The Economic Environment Project

The Economic Environment

The circular flow model of the economy

Title: The Economic Environment. The firms in this model are the businesses while the households are the consumers. The firm is responsible for the production function while the households are responsible for consumption. In his book Waste to wealth: The Circular Economy, Lacy Peter states that households in the circular flow model provide labor in exchange for payment and offer this payment in exchange for the goods and services produced. The circular flow model entails the government, consumer and business elements. The firm produces goods and services to meet the consumer demand. Households purchase these products and pay to the firms. Additionally, households also provide the labor necessary to produce the goods and services. Therefore, one cannot exist without the other. This is key to any economic environment.

The financial sector such as banks and micro finances are important to the Circular Flow Model of the economy in many aspects despite being greatly ignored. This sector is responsible for ensuring that money flows across the firms, households and the government. The financial sector allows households to save money gained from working in the firms.

This money is also used for investment purposes in factors such as the fixed assets used by the firms to produce goods and services. When the government and the households save, the money is directed towards the financial market. In order to ensure the continuance of the economy, financial sectors invest this money by lending it to the households, firms and the government hence making the flow continuous (Chand, 2016). This is critical to the economic environment. Furthermore, the financial sector determines the amount of money in the market hence the inflation rate at any one moment. The circular flow model of the economy would be incomplete without the financial sector.

Gross Domestic Product (GDP)

The GDP of a nation is the total market value of goods and services produced in the nation. GDP is effectively measured through market prices. During different times, prices tend to change especially because of inflation. Therefore, comparing the nominal GDP over different times may not be helpful as comparing the real GDP of New Zealand’s economy. Instead, real GDP, also known as the GDP in constant prices may be used to compare the market value of goods and services. Real GDP helps compare the GDP during different periods at the same set of prices. While the nominal GDP is equal on both the production and expenditure sides, the real GDP differs on the production and the expenditure mainly due to changes in relative prices between imports and exports.

Economic Environment Dissertation
Economic Environment Dissertation

One statistic that should be considered when making an international investment or expansion is the Foreign Direct Investment (FDI) rate. By understanding the level of FDI in a foreign country, it is possible to establish how competitive the market in the foreign country is. One may also use the inflation rate of the country as well as the unemployment rate to determine how suitable the new market is for the expansion. The inflation rate determines how strong or weak the local currency is hence affecting the amount of money required for the initial investment. Additionally, constant changes in the rate of inflation may be an indication of an unstable economy. On the other hand, the rate of unemployment can help predict the potential demand and supply for the goods or services. The inflation rate may also help project the cost of labor for the new branch internationally.

The Business Cycles and Business The Environment

New Zealand’s recent annual GDP was 173.75 billion US dollars while the value stood at 0.28% of the global GDP. The GDP growth rate is at 2.50%. The inflation rate has been at a steady of 4.75% since 1918 to 2016. On the other hand, the unemployment has been at an average of 6.13% since 1985 to 2016. However, the rate of unemployment fell to 5.1% during the second quarter of 2016. Although the New Zealand economy has past the peak phase, it is expected to continue growing at a healthy rate while creating new jobs.

A housing bubble occurs when an increase in demand leads to a significant increase in the house prices (Roberts, 2008). Unlike most goods and services, replenishing the supply of houses takes time hence creating a bubble with soaring house prices. Eventually, the bubble bursts due to the increase in supply and a decrease in demand. Such an event would cause the New Zealand economy to slow down significantly.

When an economic recession occurs, the number or frequency of economic environment activities decline significantly (Roubini, 2011). Some businesses are able to continue operating as long as they are able to cover their fixed cost. However, other businesses not able to cover the variable cost including labor have to shut down rather than operate at zero profit. Scarcity of supply due to high production cost leads to high prices, meaning that consumers are unable to purchase goods and services. Firms selling second hand goods, companies dealing with bankruptcies or debt problem benefit during recession. The market is also more efficient and consumers get the best value in the market.

References

Chand, S. (2016). The Economic Environment and Circular Flow of Income in a Four Sector Economy.

Lacey, P. (2015). Waste to wealth: The Circular Economy and Economic Environment. Palgrave MacMillan.

Roberts, L. (2008). The Great Housing Bubble: Why did House Prices Fall? Monterey Cypress, LLC.

Roubini, N. (2011). Crisis Economics: A Crash Course in the Future of Finance. Penguin Books.

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European Union Regional Economics

The European Union Model of Regional Economics

This paper examines the European Union economic model as an example of a regional integration for economic prospects in the world. Since 1972, twelve nations of Europe namely, Austria, Belgium, Britain, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain co-operated economically under the treaty of European Economic Commission, EEC (Bartolini). However, the Union under examination in this paper came into effect on July 1987 when the single European Act came into force, thereby amending the founding treaties to cope with the transition into a single market. For a longer time, the European Union (EU) remains the most developed model in the regional integration examples. However, lately, severe economic crisis continue to shake the very foundation upon which the union stands. From debt crisis to refugee crisis, the challenges seem so great for some of the nation members to bear. Consequently, this now puts into question the economic benefits that accrue from the integration process (Hix and Høyland).

The lack of logical solutions to the EU’s frequent crisis ideally calls into question the very steadfastness of the union. The recent financial crisis that threatened Greece to decamp from the European Union reveals the institutional and structural cracks within the Eurozone. Two other countries of the union namely, Spain and Italy, now appear posed to go the Greece way. The economic decline of the EU comes in the wake of a new global economic order. Under this dispensation, there is now economic decline of the two world’s economic powerhouses, the United States of America (USA), and the European Union, but the rise in Asian and African economies. These economic realignments already threaten the social cohesion, and both the economic and political stability of the Eurozone (Kelegama 110-131). In the wake of these crises, the European Union’s status as the viable model of regional economics now is subject to threat. In the event that the European Union recovers from the crises that are threatening to tear it apart, it will emerge even stronger, and continue its role as the global leading model of regional integration.

The European Union Model Insights

The genesis of EU’s integration has its roots in the economic hardships of the early 1950s, following the conclusion of World War II. The success of the European Union as an economic and political conglomerate lies in a number of far reaching principles. First, the continent of Europe boasts of a number of visionary leaders. Among these are Germany’s Konrad Adenauer, and France’s Robert Schuman. The two leaders conceived a political alliance that operated on communal basis, and deviated from the traditional political model whose basis was the balance of power ((Bartolini). The United States’ support played a pivotal role at its conception was also crucial in the early years. Second, the Franco-German partnership was crucial in the integration process. For years, Berlin and Paris continue to be the engine of European amalgamation. Thirdly, the European political elite always share a common vision of sovereignty. This is instrumental in the common institutions that are strong, and legally binding on matters integration. Finally, Europeans share solidarity with their leaders on consensus approach based on tolerance. In this regard, the European decision makers try their best not isolate a member country (Bartolini. This approach saw Greece retain its membership in the wake of its recent economic crisis. The tolerance of policy makers in Europe encompasses an all-inclusive approach when dealing with a member nation. The basis of decisions, often, is on consensus, and political goodwill to offer colossal financial support to poorer member nations to take their rightful place in the union.

The four principles that continue to guide the European Union in crises, enables it to emerge stronger than ever whenever similar situations arise. This enables the union to ward off crises more easily. Some of the historical challenges that the EU warded off in the past include new treaties referendum failures. A case in hand is that of Ireland’s Lisbon Treaty in the year 2008 as well as the French and Dutch constitutional treaty. In each case, a referendum threw out each of the treaty. Another is the case of Charles de Gaulle who used “empty chair” tactic to withdraw his compatriots’ representation the political bodies of the union whenever these introduced the famed qualified majority voting (QMV). Charles de Gaulle ruled French during the 1958 to 1969 period (Dinan).

A more recent development involved the EU’s adoption of the flexible approach that resulted in a Europe divided into multiple layers of integration. However, not all the countries of Europe enjoy the Eurozone status. For instance, the United Kingdom trades in the Eurozone courtesy of the Schengen passport-free agreement. UK, however, continues to use the Sterling Pound as its currency. The EU allowed this arrangement to give leeway to Euro-sceptic nations to renege on certain obligations guarded by the union treaty (Volkens). Nonetheless, the EU remains committed to its core mandate that allows it the freedom to share sovereignty with any committed nation within the continent, while still committed to the values of strong common institutions.

Regional Groupings in Other Parts of the World

Other regions of the world continue to seek regional integration to push forward a common agenda. Notable here include associations such as the African Union (AU), the Mercosur of South America, the Association of South East Asian Nations (ASEAN), and the Gulf Cooperation Council (GCC). However, nothing in their progress mirrors the EU’s success. Amongst these the ASEAN model is second to in EU in performance. Perhaps this follows their efforts that saw them send delegations in a number of times to Europe to seek the European Union’s experiences from Brussels. However, throughout its existence, the ASEAN shows no interest in sharing sovereignty, and therefore, continues to be an inter-governmental body (Kelegama 110-131). The same applies for the other bodies mentioned above. Consequently, the EU remains the world’s most successful conglomerate of nations in terms of economic and political cooperation. Therefore, the union remains the globe’s best success story in integration.

Pronouncements on closer cooperation continue to dominate the political scenes in Africa, Latin America, South America, Asia, and the Middle East, but none of the declarations of these groupings matches the EU’s spirit of cooperation, integration, and political goodwill (Kelegama 110-131). Their pronouncements over time remains mere rhetorical expressions, for after these declaration are not matched with equal seriousness in action.

The EU’s success story arises from historical reconciliation over time. This is a vital factor if any political entity wishes to develop the matching good will, and step into the world of cooperation and, eventually, integration. The engine of EU’s success story rests on the historical frequent reconciliation of two Europe’s decision makers – Germany and France (Bartolini). Years of political resilience of the leaders of these two nations, often provide the fodder needed to take reconciliation, and cooperation forward. In sharp contrast, no other regional body, matches the EU’s ambitious efforts when it comes to political goodwill. For instance, in the East Asia case, unless Japan and China show similar commitment, there will never be a genuine integration, and the ASEAN model will always lag behind the European Union (Kelegama 110-131).

Similar reconciliation must also exist between Korea, and Japan. The mistrusts in political leaderships witnessed in East Asia is rife all over the world. Issues remain unsolved because a deeply lingering suspicion by the political players of the day. For instance, when one discusses this, India and Pakistan comes to mind. So is Argentina and Brazil, Iran and Saudi Arabia, and so on. The European Union model shows that cooperation, and integration is only possible after historical reconciliation amongst the warring nations. It only then that they can proceed gradually into the necessary steps crucial for creating a regional community. After this, the regional community can go a step further and create a customs union, a free-trade area, a common passport, a single market, a common foreign-policy, and eventually a common currency (Kelegama 110-131).
The Current State of the EU

The European Union stands tall as a secure, prosperous, and a safe haven in comparison to other regional bodies of this world. Following its recent economic turmoil, however, the European Union needs to tackle its perennial major challenges, if needs to remain a global player and influencer worth emulating. It needs to tackle these challenges now with urgency, and determination. Only then will the European Union remain the world’s leading model of cooperation, integration, and economic union. However, the European Union’s current problems arise from a number of factors. First, the European Union experiences a rapid expansion and integration. The number of member states currently stand at 28. This is in contract to only 12 members in 1972. This is not commensurate with the European Union’s economic, and political strengths.

The emerging differences, and economic gaps between the member nations require urgent attention necessary. The EU must coordinate and institute the expansion of its capacity building efforts to bring all players at the same level. Currently, though, Germany and France seem to be its major beneficiaries. For these two nations, the EU provides a readily available labour force and a vast market for their rapidly expanding domestic industries. The European Union member nations must find equal footing if their model of economic integration is to suggest lessons for other bodies pursuing regional integrations (Volkens). These lessons will remain vital particularly when these regional entities come to the later stages of economic cooperation, and integration.

The second challenge that the European Union must tackle is increased fiscal coordination. This is necessary in the wake a seemingly worsening economic position. The European Union’s financial systems require cleaning, in order to bring them into agreement with the austerity plans that now most member nations embrace. The European Union continues to roll through murky waters, though. The ever persistent present danger of disintegration, and euro collapse remains. More so in the wake of rising national debt situation in member countries. Portugal and Ireland have since found their footing. Greece is reeling out of a life threatening debt situation that almost forced it out of the union. Similarly, the economic situation of Spain and Italy look dim. In addition, dissenting voices are heard in Britain, the Netherlands, and other quarters that threaten the very existence of the union as it is today (Hix and Høyland).

The Euro

The major factor that seems to deem the influence of the European Union stems from the dismal performances of the euro internationally. The union’s central bank is the European Central Bank (ECB). Presently, 17 of the 28 European Union member nations use the Euro as its currency. The fact is that euro comes second to the dollar in the forex market trading. This gives it an international appeal, and thereby makes it one of the leading global reserve currencies. The euro came into existence on 1 January 1999 (Damian 222-229). Consequently, the account currency placed the European Union member currencies at the same level of strength, and thereby, sent the entire member nations individual currencies into oblivion. At launch, only eleven of the EU states adopted the euro. These included Germany, France, Spain, Italy, Portugal, the Netherlands, Ireland, Finland, Luxembourg, Belgium, and Austria. Greece joined the union in 2001, and similarly adopted the euro as its currency. So did Slovenia in 2007. Cyprus and Malta followed suit in 2008, while Slovakia adopted the euro in 2009.

The latest entrant into the union is Latvian who joined the membership on 1 January 2014. A number of other countries outside the Eurozone also use the euro. These include the Vatican City, San Marino Republic, Monaco Principality, as well as the Andorra Principality. In addition, many territories of the Eurozone countries including Madeira Islands, the Canary Islands, the Azores, the Reunion, French Guiana, the Balearic Islands, Europa Island, Martinique, Guadeloupe, Saint Pierre, Mayotte, Juan de Nova, and Saint Martin among many others also use the euro in their day-to-day transactions. Equally, the North Korean Republic, Cuba, and Syria also use the euro. Most currencies of the world similarly exchange their currencies to the euro based on the prevailing market exchange rates (Damian 222-229).

The Eurozone Crisis

The major challenge that the EU faces today is the continued fragile economies of a given Eurozone member nations. These include Italy, Spain, and Greece. Greece recently received a third bailout package to the tune of 85 billion euros. Like before, the bailout came with stringent austerity measures. Spain and Italy faces renewed speculation on the ability to service their national debt portfolios in the financial markets (Hix and Høyland). Even though there appear to be some light at the end of the tunnel for many of the European Union countries, economists warn on possibilities of a “double dip” recession in the Eurozone.

Many attribute the European debt crisis to a number of financial guarantees by the EU nations that feared financial septicity, and by the global moneylender, International Monetary Fund (IMF). When ratings agencies downgrade the Eurozone debt, and even giving the Greek debt a junk status at one point, it creates a panic in the financial markets. Consequently, the basis of the bailout agreements requires the recipient countries to have stringent austerity plans aimed at reducing the national debt portfolio (Hix and Høyland).

The national debt crisis among the European Union member nations began in 2009. It stemmed from the inability of some Eurozone member countries to repay or refinance the nation debt of their countries. The nations affected included Cyprus, Portugal, Ireland, Spain, and Greece. They became unable to foot the loans of the beleaguered banks without European Central Bank inputs. Further assistance became necessary from the lenders such as the International Monetary Fund and the European Financial Stability Facility (EFSF). Seventeen of the member countries created the EFSF sometime in 2010 (Hix and Høyland). Its mandate was to offer solutions on the spiraling European debt crisis.

The EU’s debt crisis has its genesis from the financial crisis that plagued the world in 2007 and 2008. This gave rise to the recession in 2008 to 2012. The latter led to the property bubbles in a number of countries, including the United States, and consequently, led to the crisis in the real estate markets. The culmination of the recession was in 2009, and led to the Greece’s discovery that its previous government exceedingly under reported the national budget deficit. The pronouncements signaled Greece’s a violation of the EU treaty policy, and led to fears of the euro collapse, as it eroded investor levels. This led to unsustainable high interest rates in the euro bonds. The fear this sparked in the fiscal world led to beliefs that the Eurozone debts were unsustainable (Hix and Høyland).

In 2010, in the wake of the fear of unsustainable Eurozone sovereign debt, each lender began demanded higher interests on the EU member nations’ loans, and consequently, spiraled the debt out of control. This made most member countries fail to finance budget deficits. In the phase of negative economic growth, and shrinking Gross Domestic Products (GDP), some countries raised taxes to finance the deficit as most governments slashed their expenditures. The negative social vices and economic downturns followed. This even led to votes of no confidence in the leadership, especially in Greece. In view of this, rating agencies downgraded three Eurozone debt statuses to the junk, and thereby, worsened the investor fears. The countries affected included Ireland, Portugal, and Greece (Hix and Høyland).

The Greek Case

In the wake of the upheavals in the Eurozone in 2010, the national bond yields for a number of the EU countries shot up. Those affected included the Federal Republic of Germany, Portugal, Ireland, and Greece. The escalation in bond yields forced the Greek government to seek the country’s first assistance in May 2010 (Hix and Høyland). Now, Greece got two bailouts. All the assistance came from the EU over a five years period. During this time, the country undertook the EU-led austerity measures. It aimed to reduce costs in the phase of a biting economic recession, political, and social unrest. Come June 2015, the Greek government in a phase of political divisions amid the never ending recession, faced a default on its national debts amid calls to leave the EU altogether. To save the day, the Greek parliament voted for further austerity on 5 July 2015. This led to the third bailout to the country totalling 85 billion euros.

European Union
European Union

Further Effects

Ireland went the Greek way in its request for a bailout late in 2010, while Portugal came in next in the month of May 2011 (Hix and Høyland). Spain and Italy also found themselves in the rather precarious situation, and therefore, Spain put in her request to the EU for a bailout in June 2012; and so did Cyprus. Portugal also followed suit. However, come 2014, Spain, Portugal, and Ireland exited the bailout plan in the wake of domestic austerity actions, these countries’ fiscal reforms, and other favourable economic factors. Full economic recovery may still be far, but at least they are able to stand on their own. However, for Spain, a recent economic development in the country pushes it toward a second bailout plan.

For the European Union, the economic turmoil within the union comes amid momentous wealth shifts toward Asia and Africa. In the wake of this, the EU’s global GDP share dropped from 24 percent in 1990 to 22 percent in 2010. The emerging markets as those of China, India, Russia, and Brazil all compete the European Union for foreign direct investments, and growth resources like oil and gas. In addition, the European labour force ages drastically and now seeks leisure than work. Furthermore, the European Union lags behind in resource allocation to innovation. Innovation is the engine of growth, and where it lacks, stagnation quickly follows. The European Union’s Lisbon Strategy that aimed to turn the European Union into an economic powerhouse is conspicuously missing in action (Hix and Høyland). In addition, its latest 2020 plan, operating in an environment of lofty ambitions, certainly will not fare any better.

In this era of declining oil and commodity prices amid rising food prices economic recovery prospects for the European Union look grimmer. Simply put, future forecasts for the European Union paint a rather dark picture of the European Union, in the wake of its largely aging and immobile population. This gives the Union a competitive disadvantage in the wake of cheap labour markets in Asia and Africa, which now forces the union’s domestic enterprises to relocate to the two continents (Kelegama 110-131). This leaves the European Union economy overburdened by high unemployment rate amid rising health costs. In addition, the Asian communist and socialist development models now pose great challenges to the capitalist model of the Anglo-Saxon cooperation. Consequently, fewer Asian nations are eager to implement the American and European Union led reforms on environmental, labour, and social strata arguing this would greatly disadvantage their development plans at this critical juncture.

The third and critical challenge in the European Unionrevolves around finding a common identity. Member nations never speak with one voice, turning the union into a misdirected entity where opposing forces pull in different directions (Dinan). The current Syrian refugees’ crisis and the subsequent divisions it continues to cause in the leadership of Eurozone is a case at hand. Academicians describe it as one the greatest paradoxes of the European Union, in the phase of a widening and deepening rift. We have a European Union that progressively moved from the unification of its customs departments into a single-market economy, and currently boasts seventeen nations in its monetary union. We also have an EU that gradually increased the number of membership nations from just six at its onset to the current twenty-eight members. In this diversity that spans almost the entire continent, a common identity continues to be a great challenge.

Consequently, the European Union finds itself unable to strengthen the union’s political institutions further, in order to keep abreast with the deepening needs of this integration, in the wake of a heterogeneous membership. In the phase of a widespread public scepticism on the European Union’s vision of cooperation and integration, the citizens remain hooked to individual national values, and consequently, are reluctant in letting Brussels usurp the national powers. In addition, the two bearers of the EU’s vision, France and Germany are now openly divided on matters of economic governance (Hix and Høyland). Therefore, the union needs to find a common European voice in all matters that touch on global economic governance.

Many in the EU looked upon the Lisbon Treaty as a provider of the necessary impetus for deepening the economic prospects of the European Union, but the struggle seems to bare any fruit presently. As a result, national politicians are now reluctant to push forward the agenda for strengthening the European Union. The strongest proponent of the union, Germany, now relaxes its voice on closer integration (Hix and Høyland). This gives the sceptics raw fodder to publicly doubt the euro prospects. In this front, however, a number of European Union politicians, such as the former French president Nicolas Sarkozy, and Belgium’s former prime minister, Guy Verhofstad, who lead the liberals minds to the argument that the European Union now requires radical steps to best respond to its myriad political and economic crisis. This group believes that the European Union’s handicap stems from the weak central institutions of the European Union. Consequently, they assert that the European Union needs sufficient regulation that governs its energy and financial sectors. Unfortunately, for the group, lukewarm reception from Germany and a number of member nations continue to meet their recommendations.

The Validity of this Model

Recent political and economic crisis in the Eurozone puts heavy challenge on the European Union’s model of governance as an implantable system of governance. However, some scholars argue that this fallout is only temporary. History is rife with instances where the EU rebounded from the ashes. This group argues that the European Union will leverage its present day adversity, and move forward in its integration efforts. This group cite as an example, the 1954 case where the plan mooted for a common European defence system failed. It is this plan, however, that gave birth to the EEC in three years’ time. Another common point of reference is the empty-chairs crisis under the then French president Charles de Gaulle in 1965. His theatrical actions later resulted in the Single European Act in 1986 through a unilateral acceptance of QMV (Bartolini). In addition, the 1980s currency tribulations gave rise to the common European Monetary System, and eventually the euro.

In the wake of regional blocs’ dominance in the global economic and financial agenda, the European Union as a single player is unlikely to achieve much on its own. A long time ally, the United States, now presses for a reduction in the number of seats the European Union occupies in the Group of 20 (G20), and the global lending houses, including the World Bank, and the IMF (Hix and Høyland). In due course the changes could trigger stronger for the integration process.

In the phase of these crises, the EU continues to attract negative media attention. However, despite the critics, most governments of the member nations, and other regional groupings continue to show strong faith in this union. Of significance is the fact that despite the crises, neither the next door Russia, nor the now Asian economic giant China nor Russia sold their holdings of euros (Hix and Høyland).

Neither has the European Union’s problems dimmed other regional groupings’ quest for greater cooperation, and eventual integration. For instance, ASEAN continues to push forward its proposals for the establishment of its ambassadorial steering committee, in line with the arrangement in Brussels. They call theirs Coreper. Consequently, South Korea, China, and Japan continue to intensify the regional trilateral ministerial meetings. The aim is to establish closer ties in the East Asian cooperation (Kelegama 110-131).

Consequently, a lot exists for the benefit of many from the European Union model of integration. At the core of the matter is the fact that the European Union is a heterogeneous organization. Therefore, how the member countries manage crisis serves as a pointer to the emerging regional bodies. For instance, if one considers monetary union objectively, it becomes clear that an integrated economic and political system is necessary to evaluate the national debt of a member country, and consequently, defers speculation. This serves well those nations aspiring to forge a customs union and adopt a free market economy, which finally leads to a common currency (Kelegama 110-131).

Experts assert that the process of integration is very difficult indeed, as invariable setbacks and crises often arise. However, as one evaluates the European Union case, data available proves such sceptics wrong. The EU as a regional union boasts of an excellent record in tackling crises, and move forward ever strongly than previously. Experts attribute this to a very strong political will. Consequently, the valuable lessons from the European Union model gives an impetus on investment benefits member nations accrue from their goal to integrate regionally. In as much as the system may not prove politically convenient, however it is a platform that time testifies have great advantages to regional economies. Moreover, it is prudent to understand that integration only succeeds, in the arena where the citizens and governments believe in the cause as vital above national interests (Hix and Høyland). Consequently, where commitments lack, the regional grouping crumbles at the first bump on the road to this city called integration.

References

Bartolini, Stefano. Restructuring Europe: centre formation, system building and political structuring between the nation-state and the European Union. Oxford University Press, 2005.

Damian, Monica. “The Comparative Analysis of the Monetary Policy Strategies before the Adoption of the Euro Currency and the Impact upon the Maastricht Criteria.” Journal of Applied Economic Sciences (JAES) 3 (17 (2011): 222-229.

Dinan, Desmond. “Ever closer union: an introduction to European integration. “Boulder, USA–2005 (2004).

Hix, Simon, and Bjørn Høyland. The political system of the European Union. Palgrave Macmillan, 2011.

Kelegama, Saman “South Asia and other regional economic groupings.” South Asia (2010): 110-131.

Volkens, Andrea, et al. Mapping policy preferences II: estimates for parties, electors, and governments in Eastern Europe, European Union, and OECD 1990-2003. Oxford: Oxford University Press, 2006.

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Economic Wealth

 How Strong is the connection between Democracy and Economic Wealth

The last two decades witnessed the collapse of communism both as an ideology and political system leading to the triumph of liberal democracy across the world. This process has exerted profound influence on redefining the architecture of the global economic and political system (Huntington 1991). As a result, the economic and political landscape of the contemporary world is characterized by democratic revivalism and formation of new states based on democratic ideals. This process has indeed deconstructed the prevailing notions of democracy and economic wealth. Traditionally, it has been argued by political and economic theorist that democracy will thrive only in a society, which enjoys a particular level of economic wealth and prosperity. However, emergence of new democratic nation states in Asia, Latin America and Africa soon after the fall of colonialism and the recent resurgence of democracy in Eastern Europe after the collapse communism inspired some scholars to perceive that economic wealth is not a pre-requisite for democracy.  The newly democratic countries remained economically poor and still continue the path of democracy without higher economic growth and wealth. At the same time, there are authoritarian regimes in Middle East and South Asia that reflect high level of economic wealth even without democratic system.  There are countries like the USA and UK which present the beautiful blend of economic wealth and democracy.  Due to this paradoxical situation across the globe, economics theorists and scholars often find it difficult to reach a consensus regarding the relationship between democracy and economic wealth.

 Given the scenario, this paper is a modest attempt to explore the relationship between democracy and economic wealth. The paper examines various theories and approaches that analyze the relationship between democracy and economic wealth and tries to explore how strong the connection is.  The paper also examines the theories in the context of the contemporary economic and political order. Concluding section provides critical analysis of these approaches and highlights the need for a realistic and contextual perspective towards the relationship between economic wealth and democracy.

Democracy and Economic Wealth: Major Theories

 Democracy, according to Schumpeter (1942) is ‘the institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote’. Thus democracy implies a political system in which power derives its strength from the people. Robert Dahl (1971) provides seven fundamental attributes to democracy including:

  • Control over governmental decisions about policy constitutionally vested in elected officials
  • Relatively frequent, fair and free elections
  • Universal adult suffrage
  • The right to run for public office
  • Freedom of expression
  • Access to alternative sources of information that are not monopolized by either the government or any other single group
  • Freedom of association (i.e. the right to form and join autonomous associations such as political parties, interest groups, etc).

Ever since the inception of democracy, its relationship with economic growth has been a serious issue of debate.  Broadly speaking, there are three fundamental theories on the relationship between democracy and economic wealth. First of all, there is a prominent school of thought that highlights the positive correlation between democracy and economic growth. Secondly, there is an equally important view that negates this theory and emphasizes that democracy is not a pre-requisite for economic growth and often the relationship is negative in the case of many countries. Apart from these contrasting schools, there is another perspective that considers the relationship between democracy and economic wealth as sceptical. They argue that the relationship is neither positive nor negative and is largely depends on other factors as well. These contrasting yet very important arguments are examined below.

Martin Lipset (1969) is regarded as the pioneer of the approach that highlights a strong correlation between economic wealth and democracy.  This perspective became popular during 1960’s and 1970’s. According to Lipset democracy will emerge and flourish only in affluent societies that are endowed with a high level of economic development and wealth. He further pointed out that economic wealth is an initial condition for democracy.  Lipset stated, ‘the more well-to-do a nation, the greater the chances that it will sustain democracy. Only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self-restraint necessary to avoid succumbing to the appeals of irresponsible demagogues’.

After the seminal theory of Lipset, there emerged many academic studies that empirically investigated the positive relationship between democracy and economic wealth. The proponents of this theory also held the view that democracy lead to greater economic prosperity. After Lipset, the most influential theory on the positive correlation between democracy and economic growth was presented by Adam Przeworski, Michael Alvarez, José Antonio Cheibub, and Fernando Limongi.  On the basis of the empirical study conducted in 141 countries for the period 1950 to 1960, Przeworski reaffirmed the theory of Lipset and concluded that economically developed countries have more chances to sustain democracy. Also the theory pointed out that democracy can better promote economic wealth than authoritarian regimes.

Supporters of this positive correlation view argue that democracy provides a free and transparent political culture and equal allocation of resources among the people. This motivates citizens to invest and maximize benefit of the free market that ultimately lead to economic prosperity of the country. Democracy put restrictions on the power of the government, checks unnecessary expenditure and prevents unresponsive policies that affect economic wellbeing of the people. The theory further states that optimum utilization of resources will be possible only in a democracy that is accountable and transparent. Hence, democracy can best serve as a promoter of economic growth. Therefore these theorists highlight the strong positive co-relation between democracy and economic wealth.  The successful and prosperous economies of the USA, UK and other developed countries of West Europe were considered as the models to substantiate the theory of positive co-relation between democracy and economic wealth. The wealthiest nations of the world are generally matured democracies. On the other hand world’s poorest nation states are autocratic regimes. Sudan, Burma North Korea and Congo are examples.  Even though China shows an impressive growth rate after the globalization process, China’s GDP per capita is still $1000 making it one of the poor nations of the world (Sharma, 2012).

Nevertheless, this was questioned by many scholars who strongly criticized the positive relationship between these two concepts.  Samuel P. Huntington (1968) and others were of the opinion that democracy has weak and unstable institutions that hinders investment and economic growth. Moreover, democratic countries tend to make vulnerable policies and decisions in order to attract popular support whereas authoritarian regimes are able to make strong policies to initiate economic growth.  Economic growth needs hard policy framework that can check growth retarding business environment and factors.  Such an iron hand is not possible within a democratic structure that focuses more on sentiments of the electorate than policy priorities. Thus democracy cannot play a catalytic role in wealth creation unless there is concrete effort from the government.  Galenson (1959), Andreski (1968), Huntington and Dominguez (1975), Rao (1984-5), and Haggard (1990) etc popularized this view further.  There are empirical evidence to show this negative correlation between democracy and economic wealth.

Singapore is a classic example to show the inverse relationship between democracy and economic wealth.  When other countries in Asia heralded a democratic path following British colonialism, Singapore selected a unique single party authoritarian system that provided rich dividend to the country. When other Asian countries faced a chequered history of economic under development, political instability and social unrest, Singapore attempted a brave step towards liberalization, international trade and capitalistic growth strategy which ultimately made the country a ‘brand’ among other countries. Now Singapore serves as a regional headquarters for more than 3000 multinational companies and has world class financial and service sectors and above all a highly efficient physical infrastructure. The country consistently ranks high among ‘most attractive countries for international business’ and has achieved a per capita GDP level comparable to levels of developed western nations. According to the World Economic Forum’s Global Competitiveness Report 2006-2007, Singapore edged out Japan, Hong Kong and Taiwan to be the most competitive Asian country, while coming in fifth in world rankings. The world’s highest PC penetration among households, the well-networked broadband systems and the high-tech transport system- all symbolize Singapore’s economic achievements (Menon, 2008). All these achievements were made without a democratic government.  Other East Asian countries like South Korea, Taiwan and Hong Kong also achieved high growth rate without democratic government (Dominguez (2005).  China is another classical example to show that the relationship between democracy and economic growth is not as strong as envisaged.  Within the boundaries of the totalitarian communist rule that hardly allow democratic space to community, China is able to leverage investment, economic growth and overall development (Dominguez 2005).  At the same time, democratic countries in Asia and Africa including India, Ghana, Costa Rica, Nepal and Hungary still struggle to sustain an impressive economic growth and corruption free administration.

Economic Wealth
Economic Wealth

The positive co-relation between democracy and economic wealth is not yet visible in these countries (Dominguez (2005). Also, the emergence of democracy in these countries cannot be related to mature economic development as stated by Lipset.  After the fall of communism, there was democratic resurgence in East Europe even though these countries were not economically affluent.  Hence, there is no direct correlation between democracy and economic wealth.  More specifically, democracy can thrive even without economic wealth and at the same time, economic growth can be achieved without democratic system. This theory perhaps argues that economic wealth is better achievable under authoritarian regime than democracy. Apart from East Asian countries, there are countries of Middle East including Saudi Arabia, Kuwait, Bahrain that reflect consistent economic growth but extremely authoritarian monarchic form of government (Dominguez (2005).  Thus the theory highlights the strong negative relationship between democracy and economic wealth.

Another study conducted by Freedom House shows that ‘during 1991 and 2005, the countries that were economically free but politically repressed grew at 6.28% annually. Comparatively, the countries that were both economically and politically free grew at 2.62%. In other words, dictatorial regimes make better economic decisions for citizens than democratic ones’ (Sharma, 2012).

The third view on the debate argues that there is no consistent relationship between democracy and economic growth as assumed by scholars. Moreover, they assume that institutional structure and approach to governance are more important than the type of regimes per se. Wealth creation and prosperity are possible in both democracy and autocracy if there are proactive policies, good governance, corruption free administration and better management of economy.  As stated by Bardhan (1993) ‘A sound leadership that will resolve collective action problems and be responsive to rapidly changing technical and market conditions is more essential for growth’.  This view was supported by Bhagavati( 1995) as well. According to him, market will bring economic wealth both under authoritarianism and democracy. Nevertheless, the institutional structure should be able to make the’ right policy’ decision without compromise.  Hence, this theory confirms that there is no correlation between democracy and economic wealth and the determining factor is the nature and content of the policy.

 Hristos Doucouliagos and Mehmet Ulubasoglu(2005) studied the connection between democracy and economic growth in 70 selected countries through meta-analysis. They have derived the following conclusions:

  • There is no accumulated evidence to show that democracy is detrimental to economic growth. The findings of the data combined clearly points to a zero direct effect on economic growth.
  • Though there is no direct effect of democracy on economic growth, it has many significant indirect effects on wealth through various channels including human capital formation, economic freedom, transparency etc. Nevertheless, democracy leads to higher government expenditure and restricted international trade.
  • Though the direct co-relation between democracy and economic wealth is not to be validated globally, there still exists strong regional variation on the larger impact of democracy on economic growth. The study shows that democracy has a direct impact on economic growth in Latin America where as the relationship is very low in Asia.
  • Though the study could not establish the direct impact of democracy on economic wealth, there is positive co-relation between economic freedom and wealth creation.

There are other scholars who studied the indirect but important relationship between democracy and economic wealth.  In his paper, Democracy, Governance, and Economic Performance: Theory and Evidence, Yi Feng (2003) established that democracy indeed can make a positive effect on economic wealth and development at least indirectly.  The indirect effects implies policy certainty, political stability, the establishment and enforcement of rules that protect property rights, the promotion of education, the ability to promote private capital, and the reduction of inequality.  All these indirect indicators engender increase in investment and thus pave the way for enhanced economic growth.

In a similar study, Gerring (2005) also perceive that the connection between democracy and economic wealth is relevant, though it is indirect.  According to them, democracy creates four types of capital- human capital, social capital, political capital and physical capital – in a country. Economic growth can be achieved through the effective utilization of these channels.

Kurzman (2003) conducted a study on the relationship between democracy and economic growth using time series analysis and came out with varying findings as mentioned under:

  • Democracy has a significant impact on investment and this will have positive effect on economic growth. Free market economy and economic reforms coupled with transparency would eventually lead to more investment contributing towards economic growth.
  • Democracy increases government expenditure and this will have a negative impact on economic growth.
  • Social unrest and mass movements are intense in democracies. This is negatively co related to economic growth.

He thus concludes that democratic relationship with economic growth is always complex and greatly depends on the domestic situation, political culture, quality of regime and pace of market reforms.

Critical Analysis

While analyzing the diverse arguments on democracy and economic wealth, we can assume that there is no generalized pattern of relationship. The strength of the relationship depends on other related factors like quality of democracy, historical legacy, committed leadership, lack of corruption etc. If these pre-condition are achieved, democracy will definitely lead to economic wealth. At the same time autocratic government may lead to economic wealth but it will not be sustainable unless the government follows less repressive policies. When we examine the case of developed countries like the USA, Britain, France and Germany it is evident that democracy and economic growth exhibits a strong positive relationship in countries that have attained economic growth prior to democratization.  The countries like India, Ghana and Pakistan selected democratic path even before attaining significant level of economic wealth. Hence, the approach that believes that ‘democracy will automatically follow economic wealth’ will not be sustainable whereas the theory that ‘economic growth will follow democracy’ may be more realistic.

Conclusion

Even though empirical studies conducted across the world proved the negative co-relation or zero- effect factor in democracy- wealth paradigm, it is a fact that authoritarian regimes have very low human development indicators unlike democratic countries. In the Middle East and China, economic wealth does not provide corresponding improvement in health, education and other social indicators. Economic growth impacts on human development through different channels like increase in per capita income, poverty reduction and higher public expenditure in education, health and related sectors.

However, while analyzing the success story of non-democratic countries with high economic growth, it is clear that, the desire for appropriate policies to reduce income inequalities and to allocate proportionately to the social sectors is sometimes lacking in these countries. Thus, the important question here is the utility of ‘wealth’ if it is not utilized effectively for the benefit of the people. The record of democratic countries is far better in this case. Amartya Sen (1999) expanded this aspect and focused on enhancing capabilities of the individual than increasing economic wealth. Authoritarian regimes may be good for creating wealth but the proliferation of wealth and equal distribution of resources requires a responsive government. In this context democracy has proved better result than autocratic systems.

Democracy and economic wealth indeed have a strong relationship even though the connection is not always positive. Democracy may lead to both positive and negative effect on economic wealth and prosperity. The real ‘connection’ largely relies on the institutional framework of democracy and its rational decision to initiate bold policies of economic development.  Therefore, we can conclude that democracy is not a magic lamp that automatically provides economic wealth. Thus, the future prospects of democracy as a form of governance will depend on the effectiveness and capability to channelize these high spirit and vibrancy of democratic institutions for harnessing a growth strategy based on economic freedom, transparency, participation and accountability.

References

Almond G. A. and Verba, S. (1963) The Civic Culture: Political Attitudes and Democracy in Five Nations. Princeton, NJ: Princeton University Press.

Andreski, S. (1968)  Military Organization and Society. Palo Alto: Stanford University Press.

Bardhan, P. (1993 ‘Democracy and Development: A Complex Relationship’. Berkeley, CA: University of California, Berkeley.

Bhagwati, J. (1995) Democracy and Development: new thinking on an old question. Indian Economic Review

Dahl, R. A. (1971) Polyarchy: Participation and Opposition. New Haven, CT: Yale University Press

Doucouliagos, C.(H.), (2005). Publication Bias in the Economic Freedom and Economic Growth Literature. Journal of Economic Surveys 19, 367-89.

Feng, Y. (2003) Democracy, Governance, and Economic Performance: Theory and Evidence. Cambridge, MA: The MIT Press

Galenson, W. (1959). Labor and Economic Development. New York: Wiley

Gerring, J and Rodrigo Alfaro. (2005) “Democracy and Human Development” (Paper presented at the annual meeting of the American Political Science Association, Washington, D.C., September.

Haggard, S. (1990) Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, New York: Cornell University Press

Huntington, S. (1968) Political Order in Changing Societies. New Haven, CT: Yale University Press.

Huntington, S. (1991) The Third Wave: Democratization in the Late Twentieth Century. Norman, OK: University of Oklahoma Press

Kurzman, C., R. Werum and R. E. Burkhart.(2003) Democracy’s Effect on Economic Growth: A Pooled Time-Series Analysis: 1951-1980, Studies in International Comparative Development.

Lipset, S. M. (1959) ‘Some Social Requisites of Democracy, Economic Development and Political Legitimacy’. American Political Science Review 53(1):69-105.

Lipset, S. M. (1994) ”The Social Requisites of Democracy Revisited” American Sociological Review, vol. 59 (1): 1-22

Menon, S. (2008) Singapore Economy: The way Ahead, IUP Press, India.

Przeworski, A., M.E. Alvarez, J.A. Cheibub, and F. Limongi (2000) Democracy and  Development: Political Institutions and Well-being in the World 1950-1990. Cambridge: Cambridge University Press.

Rao,V.(1984). Democracy and Economic Development. Studies in Comparative International Development, 39, 67-81.

Raudenbush, S. W. 1994. Random

Schumpeter, J. (1942) Capitalism, Socialism and Democracy. London: Harper Perennial

Sen, A. (1999b) Development as Freedom. Oxford: Oxford University Press

Sharma, Dhiraj. (2012) Democracy correlated with Economic Growth?  The Economic Times, February, 28.

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Economics Dissertation FDI India

The Impact of FDI on Domestic Competition and Industrial Growth in Emerging Economies: The Case of India

The increasing inflow of Foreign Direct Investment (FDI) over the years to emerging economies is seen with great optimism by governments and policy makers since it is expected to uplift the economic position of the host countries through positive spill-overs. Various studies have examined the impact of FDI on the domestic firms, economic growth and productivity of the host economy, highlighting the positive externalities that make this investment a worthwhile option to explore. However, the fact that this investment may sometimes negatively affect the output of the host economy or the behaviour of domestic firms is not thoroughly explored, especially with respect to developing economies where FDI may cause domestic firms to exit or prevent the establishment of small and medium enterprises. Furthermore, most of the previous studies have focused on either the domestic industry or the industrial output or exports without simultaneously analysing the effect on a combination of such factors. This study therefore incorporates the effect of FDI on domestic industry in terms of the presence, entry and exit of domestic firms and the growth in output and export orientation of the host economy. The relationship between FDI with the different variables that contribute to the domestic competition and industrial expansion and growth has been analyzed. The results of the analysis show that while FDI has a strong association with the output and export growth of the host economy; it does not appear to add value. Simultaneously, it causes a large number of local firms to exit the industry. Nonetheless, it appears to stimulate the local industrial growth by allowing new firms to enter and enhancing the market capitalization of listed firms. Furthermore, the number of micro, small and medium enterprises (MSMEs) and their employment rate also shows an upward trend with FDI. The growth in exports, especially high technology exports stresses on the presence of technology spill-overs to the host economy.

FDI Dissertation
FDI Dissertation

This study considers the impact of FDI on the host economy by taking into account various factors, each of which can be a priority for policy makers and an incentive to attract foreign investment. However, it is essential to understand how FDI affects the industry on the whole by studying the impact on each of them in isolation. The research aims to inter-relate the literature available on knowledge and technology spill-overs and competition to understand how local firms derive benefits from FDI in their country. The objective is to understand if increased inflow of FDI prevents the entry and growth of domestic firms in emerging economies. Simultaneously, it strives to determine if the entry of a foreign enterprise leads to an exit of local firms from the industry. Additionally, it is also aimed at understanding how FDI can shape the industrial output and export competitiveness of the host country.

Research Questions

  • How does FDI affect the entry and exit of domestic firms in the host economy?
  • Does FDI induce industrial expansion in the host economy?
  • Do local industries in emerging economies experience an increase in the output and export growth as a result of FDI?

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New Economy and New Culture

Global Business Environment

New Economy and New Culture

Moving towards a New Economy. Traditionally an economy was defined in terms of deciding factors influencing the distribution of limited and scarce resource among the competing forces in highly competitive environment. The scope of the subject was limited to efficient performance of production processes. The agenda of fairness has been rarely incorporated in the economic system. Economic theories were not contributing enough to resolve the economic and practical problems. Freedom of mind lost its connection with reality and introduced hypothetical theories to resolve the economic issues prevalent in the environment. These theoretical frameworks present comprehensive and ample method of evaluating the individual behaviors but at same time produce variety of testable issues which demand extensive and profound scrutiny.

Behaviors of individuals are examined and analyzed by numerous economic endeavors and economic agents. It is very difficult to define culture as it implies numerous meanings, transformed into various aspects without any mutually agreed definition. Culture is associated with the subject of humanities and social sciences and its meaning varies widely across disciplines. It ascribed different meanings in different centuries and the most recent one focused on the intellectual development of entire civilization and entire lifestyles of individuals which supplement the cultural values. Culture is social frame work which defines the attitudes, beliefs, norms values shared by large group. The main objective of relating economy with cultural dimensions is to investigate the role of cultural instruments in economic development and economic performance of the society (Throsby, 2001).

New Economy and New Culture

Some of the extremists believed that new economy would be free of all the inflationary problems which would lead to recession or economic downturn because of technological development. According to (Wired, 1998) new economy would evolve with the help of technological change, globalization in the economy and skills and creativity of individuals in the society. Development in information technology would largely impact the work in production industry. Technological change is revolutionary change which enhances the workers ability and skills and affects the social choices of individuals (Zuboff, 1988).

Globalization would narrow down the geographical boundaries and expand the market across the borders and scope of the new economy would be globalized. This globalization would redesign the rules of competitiveness in the economy. It has differential effect in the society and has enabled to achieve free market mechanism against protectionism (Brink Lindsey, 2001). The effect of globalization has also deprived local culture from its unique cultural factors. So the cultural factors have also evolved along with the economy because of dramatic changes in the world. New economy demands completely new skill set among workers. Ne economy values creativity and innovation of the individuals to compete in global market.

New economy capitalizes on the value of intangible assets and provide dynamic and information rich environment for operation to its workers. (Malone, 1999) New economy has produced heterogeneity and flexibility in cultural instruments of the society and has established unique relationship between culture and economy. Contribution of creative sector in the economy has highlighted that the problems of cultural policy are almost the same as problems of economic policy. New economy is described as global, networked and information rich economy with creative and innovative workforce. It generates niche- marketed goods and services staffed by intelligent and culturally rich workers and satisfy the creative and cultural needs of individuals. Cultural needs of individuals evolve with the growth in creative sector of the society (Healy, 2002).

The focus of cultural values has shifted from direct economic contributions produced by creative industries towards indirect economic benefits like creativity and innovation, employability and social inclusion. Social and cultural values, capital and human characteristics are highly considered factors in the formulation of cultural policy which is associated with the economic policy (Böhm & Land, 2009). Development in the work life and labor markets demands the understanding of motivational factors of workers. Creativity and innovation has generated new appeal for culture in the new economy. Cultural context of economics can be easily explained as economic agents observe and breather in the cultural environment which regulates their behaviors and outline their preferences. Cultural economy helps to scrutinize the social and economic dimensions of the society.

Contemporary Business and Economy

Evolution in the economy and international standards have created intimidating business environment for several multinational companies and their brands operating globally. Newly evolved business environment poses challenges of economic downturn, high cultural sensitivity because of cultural shifts in the society, lack of motivation and job satisfaction among the workforce and corporate scandals leading to lack of trust in capital markets. These challenges are attributed to globalization of market, development in information and technology and diversity in the workforce. Organizations operating in this highly unpredictable working environment are struggling to restore their trust in the corporate world. Some organizations are trying to regain their position in this hostile environment by setting ethical standards, strict rules, establishing transparent processes, addressing public concerns, performing cultural audits and by establishing social challenging performance targets. All these efforts pave path towards the formation of new economy and new culture collectively described as cultural economy (Goodman, 2004).

Organizations in contemporary business environment are highly susceptible to social, cultural and moral issues of the society. Changes in the operating environment of businesses largely sway the skill requirement of businesses. Business organizations are adapting and transforming their operating activities according to the cultural, social and moral standards of the society. This transformation largely influences the competitive position of the business in competitive landscape. It also helps in developing positive image and repute of the business in the society. Change agents like economic environment, technology and globalization have forced the organizations to capitalize on the cultural economy in order to adapt and perform landmark success in their industry. Implications of contemporary issues raised by the environment could be easily modified and capitalized by balancing their business environment with new economy and new culture (Crane & Matten, 2010.).

Importance of New Economy and New Culture

Cultural processes and values adapt to material environment. The role of culture in the economic development of third world countries could be effective by identifying their cultural integrity and cultural aspirations of poor people and improving their material circumstances according to their cultural traditions. Development of culture and economic circumstances are intertwined in the society. Development projects introduced by NGOs in under developing countries for raising their living standards and economic conditions largely depend on the understanding of their cultural traditions. This explained that culture determines the scope of material process in economic context  (Throsby, 2001). The driving force in international market is culture and creativity. The impact of culture is evident not only to the economy but also to their society. Increase importance of culture in economy and society has transformed the way of creation, consumption and enjoying cultural products. Culture is not only significant mean towards economic growth but also fundamental factor in social cohesion and development of human civilization. Cultural industries deal with the conception, production and commercialization of creative products which have social and economic importance in the market.

From 1999 to 2003, growth in cultural and creative industry in European Union was 12.3% more than economic growth. In 2004 cultural sector employed 5.8 million people in Europe. Moreover the jobs created by cultural and creative sector provide sense of assurance and commitment, job involvement and satisfaction to their workers. Cultural industries contribute towards enhancing the economic performance of the countries. The Great Wall of China as cultural heritage is source of tourist income and attracts national investment. It enhances the value of the brand of the national products and mobilizes the economy. This example illustrated the economic and social contribution of culture in the society (Pol, 2007).

The concept of knowledge-based economy provides economic support to creativity and talent and emphasizes on the framework of cultural growth and development. Traditional production factors have evolved and change in the new economy. Key underlying factors of social and economic growth are knowledge, creativity, innovation and skills. It has not only changed the economic structure but revolutionized the development of economy and society. Economic growth and development largely relies on the application new ideas and creativity in the cohesive economy. Influential component of culture, behavior of individuals and social groups emphasize and lead toward the development of society. The idea of cultural materialism enabled better understanding of the relationship between culture and economic development. Development of society largely depends upon the development of culture and arts. UN is also taking initiatives, passing resolutions and policy papers to ensure that to introduce cultural industries in the policy formation of developing and under-developed countries. This explained that efforts are being done to shift from narrative importance of cultural economy towards the performativity. Realizing the importance of cultural economy, international and national organizations are taking practical initiatives to incorporate cultural dimension in their economy (Anon., 2009).

New Economy
New Economy

Qualitative research on arts and culture have exhibited that it positively contribute towards the better health and well-being of individuals, improve the social identity and cohesion, community development and economic benefits to the society. Cultural and art oriented projects enhance the personal motivation of individuals and provide social esteem leading to healthy benefits to the society. Cultural economy fosters intercultural understanding which helps to accommodate diversity in cultures and populations. Cultural exhibitions and festivals played significant role in validating the diversity in the workforce and overcome the problem of social isolation in the work environment (Coalter., 2001). Highly competitive nature of business demands the workforce to be highly motivated and satisfied which in turn would contribute towards the high productivity and improved economic performance. Economic effect of art and culture could be explained by dollar value generated by creating jobs for artists, investment in tourism and revenue generated from the cultural artifacts. Cultural economy helps in the creation of energetic and creative work environment which is very crucial for contemporary business and economy (Azmier, 2002).

Historically business environment was confined to geographic boundaries but globalizations and development in technology has revolutionized the business environment. Human capital is considered as most important asset for the enhancing the productivity and economic activity of the businesses. Cultural economy nourishes the creative and social needs of employees and work as knowledge multiplier in securing sustainable competitive advantage for organizations. Cultural economy has also enlightened the creative insight of businesses to develop products and services matching the cultural traditions and integrity of the people. It is also encouraging workforce to actively participate in contemporary business environment. Policy makers and businesses largely comprehend the significance of cultural industry in the economy and its importance to survive in global and competitive market. In contemporary business environment market value of the products largely rely on the uniqueness of products its performance and innovative appeal in establishing unique competitive edge from the market. Customers highly value the innovative and unique product which is coherent with their cultural identity (Thomasian, 2009).

Twentieth century is dominated by knowledge workers and challenges of global market place. These global challenges demand the creativity and innovation in the business processes and products offered by businesses. Cultural economy serves the dynamic needs of global marketplace and contributes creativity by ensuring the sustainable competitive advantage based on creative and innovative workforce. According to (FREY, 2009) institutional effect of culture on economy is extremely challenging to evaluate. Some of the researchers examine the institutional effect by estimating social value created by cultural institutions. Social value is subjective in nature and cannot quantify the value created by cultural institutions in the society. Cultural economics is considered as branch of economics which incorporates psychological and social elements in economic to influence the intrinsic motivation of individuals. Monetary value of economic effect of cultural economy could be easily evaluated by the revenue generated, creation of new jobs and with the ancillary businesses attached to it. Hence this new term of cultural economics is largely affecting and supporting the contemporary businesses and economy. It helps to overcome the challenges of competitive, global and technologically efficient market place and intrinsically motivate it workforce by fulfilling the cultural and social needs

Relationship with the Banking Industry

The agenda of this study is to investigate the normative assumption which states that cultural economy completely relies on the real economy of the world. The business environment under study is financial services sector or banking sector. Cultural economy has evolved and restructured its long term relationship with the economy and social factors. The basic assumption is that cultural economy is largely substituting the finance and manufacturing industry in the urban society. The research conducted by Pratt in 2012 explained that normative connection between culture and economy is inconsistent. The experience of recent recession has forced the economist to reconsider the relationship of culture with the economy. The assumption that is recession cultural industry would hit a setback was completely rejected when in recent austerity creative industry flourished as compare to other periods. While banking industry was highly leveraged and with risky loans caused failure of banking systems. The problem rose because of over extension of assets which multiplied the problem and state financed the bank’s debt it lead to the issue of sovereign debt (Pratt, 2012).

The relationship of cultural economy and financial institutions like banks are questioned frequently because of financial and sovereign debt crisis. Investigation of this relationship leads to the formation of new economy concentrated on the logical position of cultural economy. Social mobility of people from lower class and middle class towards cultural products to have fun and luxurious aspect of cultural factors forced cultural market modernize the way of entertainment. Banking industry provided finances to Greek state but with the shrinkage in public or state investments cultural consumption by the people remain same. In comparison to financial sector it flourishes and exploits the city resources  (Souliotis, 2013). These empirical researches exhibit that cultural economy has more complex and intricate relationship with the banking industry. In case of recession cultural industry and financial service industry move in opposite directions. Prior researches could not clearly identify the underlying reason behind this deviation form normative assumptions of cultural economy. Moreover it is proposed that economic desire is based on the individualistic behaviors while cultural desires are based on collective behaviors of the society.

These evidences explained the fact that banking industry is not influenced or affected by cultural economy. These two parts of economy stand alone. Underlying reason may be the social mobilization of the social classes in economy. Upward social mobilization and luxurious entertainment were some the driving forces which motivated the cultural consumption even in austerity. While at the same time shrinkage of public funds and shortage of bonuses for the employees of financial services in the period of recession explained that it portrays negative relation during crisis. There may be some hidden underlying variables which demand more research on this complicated phenomenon between cultural industry and banking sector.

References

Anon., 2009. Measuring The Economic Contribution Of Cultural Industries. 2009 Framework for Cultural Statistics Handbook No. 1. Montrea: UNESCO Institute for Statistics.

Azmier, J.J., 2002. Culture and Economic Competitiveness: An Emerging Role for the Arts in Canada. Canada West Foundation.

Böhm, S. & Land, C., 2009. No measure for culture? Value in the new economy. Capital & Class, 33(1), pp.75-98.

Brink Lindsey, 2001. Against the Dead Hand: The Uncertain Struggle for Global Capitalism. New York: Wiley.

Coalter., F., 2001. Realising the Potential of Cultural Services: Making a Difference to the Quality of Life. London: Local Government Association.

Crane, A. & Matten, D., 2010.. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.

FREY, B.S., 2009. Cultural Economics. CESifo DICE Report.

Goodman, D.M.B., 2004. Meeting the Global Challenges of the Contemporary Business Environment. New York: Royal Society for the encouragement of Arts.

Healy, K., 2002. What’s New for Culture in the New Economy? The Journal of Arts, Management, Law and Society, 32(2), pp.86-103.

Malone, M.S., 1999. Reflecting on a New World of Business. In Impart, pp.36-42.

Pol, H.v.d., 2007. Key role of cultural and creative industries in the economy. UNESCO Institute for Statistics.

Pratt, A.C., 2012. A world turned upside down: the cultural economy, cities and the new austerity. In Pratt, Andy C. “A world turned upside down: the cultural economy,. Proceedings of the Regional Studies Association Winter Conference., 2012.

Souliotis, N., 2013. Cultural economy, sovereign debt crisis and the importance of local contexts: the case of Athens. Elsevier, 33, pp.61-68.

Thomasian, J., 2009. Arts & the Economy: Using Arts and Culture to Stimulate State Economic Development. Washington: National Governor Association.

Throsby, D., 2001. Economics and Culture. Cambridge University Press.

Wired, 1998. Encyclopedia of the New Economy. Wired Magazine.

Zuboff, S., 1988. In the Age of the Smart Machine: The Future of Work. New York: Basic Books.

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