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The Google Tax

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The European Treasury, individually as member States or collectively as Union, has so far reached – with a race to the bottom – as many as 72 agreements with large global companies.

Tax competition is still very strong and active. Just think of the US corporate tax that-following the latest reforms- has  decreased to a maximum 26% rate, more than one third less than the previous rate, with a US average corporate tax rate which is now below all OECD and G7 levels. Similar approaches, however, are developing in Argentina, Colombia, Luxembourg, Canada and even Japan.

Conversely corporate taxes have increased in Turkey, Portugal and Taiwan, with further increases – albeit slight – also in India. They are selective increases to favour some foreign or national companies compared to others.

At world level we now have as many as eleven jurisdictions –which account for 27% of the total corporate taxes in the world – that are currently increasing corporate  taxes, while all the other small and large countries will keep on competing fiercely at tax level with their neighbouring countries.

In short, technology has made all the old tax strategies obsolete.

In fact, currently competition between EU tax systems costs the weakest countries 60 billion euros a year.

It is worth recalling that nine of the twenty companies with the largest capitalization in the world are digital.

The most used corporate tax avoidance strategies to move profits sourced in EU countries to offshore tax havens include the “Dutch sandwich”, the Luxembourg tax rulings-which have recently come to light with the LuxLeaks scandal which hit the headlines – or the specific Irish tax policy, known as the double Irish arrangement.

They rely on the tax loophole that most EU countries allow royalty payments be made to other EU countries without incurring withholding taxes. However, the Dutch tax code allows royalty payments to be made to several offshore tax havens, without incurring Dutch withholding tax.

The Dutch sandwich is based, at first, on the Dutch national rule according to which the dividends and surplus value of a parent company can be transferred to its subsidiaries without paying any tax.

Hence any capital can be transferred to companies based in the Netherlands, thus avoiding all taxation on this liquidity.

Therefore the Dutch sandwich behaves like a “backdoor” out of the EU corporate tax system and into the untaxed non-EU offshore locations.

On the other hand, Luxembourg tends to enter into bilateral agreements with large companies and multinationals, as in a sort of State-company agreement. Everyone tends to do so, but in Luxembourg the transactions and agreements with companies are always particularly beneficial to the private sector.

Ireland imposes a maximum 12.5% corporate tax rate on the total taxable income stated. For purely financial companies said tax rate is only 10%.

Currently the EU tax policy is still based on the destination principle which allows for VAT to be retained by the country where the taxed product is sold.

This is a strategy dating back to the period when the European Union had to deal with the booming phase of Internet sales.

In that case, however, it was a matter of selling traditional goods in a new way. Nowadays brand new goods are sold on the Internet in an even more unusual way.

For IT companies, however, the matter is even more complex, considering they can make turnover and profit anywhere without having any kind of permanent and stable organization where they sell or buy product (or, possibly, produce them).

According to the latest data, with the aforementioned  “Dutch sandwich” strategy, in 2016 Google put aside as many as 3.7 billion euros on a total taxable income of 15.9 billion euros.

As all web firms do, it is enough for an Irish subsidiary of the Californian company to sell products globally via royalty schemes to a Dutch company without staff or operations in progress or to another Irish subsidiary also incorporated in Ireland, but managed from an offshore tax haven like Bermuda..

Over a period of three years, the well-known monopolistic Internet firm of California has “saved” approximately 34.2 billion euros, with an annual saving increase of about 7%.

At this juncture, we could only define a universally applicable legal formula of registered office or business organization, in addition to the one of the tangible or intangible place where the tax is generated.

Obviously we also need to imagine the tacit blackmail power of major corporations operating on the Internet, which have very useful databases for all governments and for the US one, in particular. We should also consider to what extent this information and tax asymmetry is useful for the US hegemony over global markets.

This is the geopolitical issue: the tax supremacy of major web firms is an essential and irenouceable factor of the new US hegemony, namely of the New American Century.

With a view to curbing web majors’ tax power, someone has also considered the formula of “meaningful interaction” with users, obtained through widespread digital channels.

It may happen, however, that at least part of the online turnover is produced through peer-to-peer channels between the company and some customer sectors or through a splitting of the IT mediation between small companies, carried out by customer groups.

With the pretext of “dedicated” content, you can avoid taxation and artificially limit the visible invoicing in one  single country.

A faster option than “significant interaction” would be to hit only the companies which invoice the intermediate services (advertising, etc.) to the web majors.

Nevertheless, if the web majors bought also these intermediaries, we would go back directly to the Dutch, Irish and Luxembourg tax avoidance schemes and practices.

Furthermore, current data points to a 3% average tax for the companies supplying services to the web majors in Italy and in the rest of the European Union.

In the latter case, the European Commission foresees revenue of only 5 billion euros for the whole EU-27.

However, if we calculate the average of the tax rates currently in force in Europe, the Internet majors pay income tax rates equal to 9.2%, as against the EU average rate of 23.3%.

Is it rational, however, that companies are taxed only on the basis of self-stated annual invoicing?

In essence, with current regulations the sale of data or User Generated Content cannot be taxed properly and profitably.

In this respect, the EU has proposed two different levels of taxation, but considering the digital platform to be a “presence” of company and, therefore, a “permanent and stable organization”.

The criteria under discussion will be the following: exceeding a revenue threshold of 7 million euros in a single EU Member State; the presence of over 100,000 users in one Member State during a single fiscal year; the presence of over 3,000 contracts for digital services concluded between company and users in a single fiscal year.

Hence, with a view to circumventing EU rules, the Internet majors can rely – for their “permanent and stable organization” – also on systems based outside the EU. They can also distribute their users among various micro-companies, not necessarily having a permanent and stable organization in the country using them. Finally they can invoice the 3,000 minimum contracts differently.

A second proposal, still under discussion among the EU leaders, regards the “temporary tax” on digital activities which, moreover, are not currently taxed in any way by the EU.

Hence, according to this proposal, revenues resulting from the sale of advertising space for goods or services other than the means used would be taxed.

Or the revenues resulting from the sale of data based on the information provided, free of charge, by users would be taxed.

Obviously the tax would be collected by the Member States in which the users are located.

Are we sure, however, that an online service can be used without being tracked? This is the rule in what is currently known as the dark web.

If smuggling is the strategy used by all those who do not want to pay taxes on sales, the dark web could become – with some mass IT devices – the new Tortuga of Internet majors.

In Italy, the new Budget Law provides for a tax on digital transactions -as from 2019 – but only relating to the provision of services to subjects resident in Italy both by national companies and through non-resident companies.

In more specific terms, each transaction shall be taxed at 3% net of VAT, thus further loosening the legal connection existing between company’s presence and provision of services, i.e. between “permanent and stable organization” and online commercial activity.

The Italian rule for 2019, however, regards only business to business transactions, thus explicitly excluding both e-commerce ones or the final business to consumer connection.

Much Internet content, however, can easily shift from  business to business(B2B) to other types of sales or supply.

Therefore the tax levied should be the withholding tax on revenues, which creates a difference between resident and non-resident companies, which could not suit the EU system.

Hence, again with reference to Italy, the new tax will be neutral with respect to the place of origin of the transaction, but revenues can be subjected not only to the 3% levy, but also to other taxes.

Moreover, it could also be possible to carry out manoeuvres on the prices of the IT supply, with a sort of new dumping on EU or Italian companies by the big Internet majors.

On the other hand, the Italian web tax relies only on self-certification. There will be trouble.

If the web tax and the other taxes on the Internet are VAT modelled, we will face the problem that the VAT  transitional regime, defined in Europe until 1997, is still currently in force.

Not to mention the fact that the transfer of capital via the Internet is fully uncontrollable for the States or unions of States and that information gap and asymmetries between States and Companies in this field are such that everything relies on the “good will” of the subjects taxed. Too little.

A solution would be to equip the EU with a stable IT system capable of controlling, at least, a significant part of commercial transactions via the Internet, but this is almost science fiction.

Otherwise, stringent and fast regulations would be needed to definitively close “tax havens” both in the EU and elsewhere but, apart from the unavoidable delays, the result would be that the countries which are currently tax havens would ask for something-indeed, much – in exchange to the other ones which are not tax havens.

Or it could be possibly stated very frankly that the EU market does not accept the free movement of capital in this sector.

However, this would favour the geopolitical areas that would like to use what, in their eyes, would be considered a European weakness.

Nonetheless, here as elsewhere, we should really rethink the architecture of the world economic and financial system.

Said system results from the fully geopolitical irrational anarchy which saw Eurasia yield to the US unipolarity, which currently no longer exists, at least according to the 1990s standards.

Here as elsewhere, we should import the idea of a great liberal and free trader, a disciple of Luigi Einaudi who, in the 1950s, imagined the “army of labour”.

I am referring to Ernesto Rossi who, while assuming a public system using the huge mass of post-war unemployed people, clearly theorized – as a liberal – “a marked  integration of Socialist elements into the market economy”.

Abolire la Miseria was written by Ernesto Rossi in 1942, on the island of Ventotene where he had been confined. It was published in 1945 and then re-edited in 1977 after his death.

The Tuscan liberal thinker theorized no “social safety nets”, but rather the creation of an army of labour to be recruited as an alternative to the military service.

The army provided all its members with essential services, with dignity and autonomy, but the “army of labour” had to work both on public infrastructure and on land use and maintenance activities, i.e. all the productive activities that – as Keynes said- could not attract and rely on private capital, which would record no sufficient and quick returns.

What about including clearly Socialist mechanisms in the current financial system, and not only through tax systems, thus rightfully leaving high-income activities to private capitalism?

It would finally be the merger between the two best intellectual and technical lines of Italian democracy, namely social Catholicism and secular Liberal Socialism.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Connectivity now. Boosting flows of people, information, energy, goods and services

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On April 8, St Petersburg hosted the 12th Northern Dimension Forum. This forum, established in 2007, is a major annual corporate business event for cooperative policy and brings business directors and potential investors from Russia and the European Union including the Baltics, and Scandinavia.

The forum was organized by the Northern Dimension Business Council in cooperation with the Association of European Businesses, the Graduate School of Management at St Petersburg State University and the Skolkovo Moscow School of Management.

This forum was devoted to the theme: “Connectivity now. Boosting flows of people, information, energy, goods and services.” It was attended by over 400 representatives of Russian and foreign business circles, government agencies and scientific, education and non-governmental organizations.

Leading business experts of the partnerships of the Northern Dimension, the Institute and the Association of European Businesses discussed topical issues and opportunities for promoting cooperation in environmental protection, the circular economy, energy efficiency, transport and logistics, healthcare digitization, efforts to overcome the aftereffects of the coronavirus pandemic and creative industries.

As expected, the forum helps to take another major step forward in discussing many strategic spheres of business between Russia and those regions. There were plenary meetings as well as sessions working groups. Despite the contradictory signals between Russia and the European Union, it was another opportunity to have some fruitful dialogue, especially in the current difficult conditions, – develop solutions on a wide range of cooperation issues in the North of Europe.

On the other hand, business institutions and the entire system of economic relations are still evolving for these years, indicating that there is no alternative to reasonable cooperation. It is however necessary to find common business language in the fields and other spheres of crucial importance for international cooperation.

Russian Foreign Ministry’s report pointed out to a diversified and multifaceted nature of regional cooperation in Northern Europe. It said the important components include the programs of cross-border and interregional cooperation between Russia and EU countries (Poland, Lithuania, Latvia, Estonia, Finland and Sweden), plus Norway.

There are programs underway within the framework of the current budget cycle that involves over 500 Russian project partners, and new programs are being prepared for the next seven-year period.

They reaffirmed their willingness to broaden versatile and mutually beneficial cooperation for the sustainable development of Europe. It emerged from a number of reports during the forum that trade and economic relations are now remarkably expanding between the European Union and Russia.

Over the years, the business growth has been driven by the efforts of the business community. This has also to do with the quality of economic exchanges and investment, businesses’ interest in expanding to new markets, and their confidence that these markets provide drivers for economic growth. Admittedly, trade decreased for various reasons since 2013, it then reached $417 billion, but later shrank to a mere $200 billion.

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Economy

North Macedonia’s Journey to the EU

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Prime Minister Zoran Zaev’s new cabinet is confronted with a number of economic challenges, exacerbated by the economic hit to the global economy caused by the pandemic In 2021, North Macedonia will take economic decisions that will shape the course of the country’s future.

The issues Skopje faces

Despite a modest population of 2-million, North Macedonia repeatedly makes headlines, often due to apparently  intractable disputes with neighbouring countries. Athens’s trade embargo imposed on North Macedonia in the 1990s marked the start of a 27 year deadlock between the two countries, which ultimately stalled North Macedonia’s accession to the EU. Only recently did Skopje resolve the dispute with neighbouring Greece over its official name which Greece had previously taken issue with due to the fact that ‘Macedonia’ is also a region of Greece, and the use of this name was interpreted by Greece to be an assertion of territorial ambitions in the region.

This dispute affected the country’s other diplomatic ventures. In 1999, North Macedonia was one of the first post-Yugoslav signatories of the NATO membership action plan, only to have its accession vetoed by Greece in 2008.  Ultimately, North Macedonia’s Stabilization and Association Agreement with the EU has not been the diplomatic catalyst that Skopje hoped would ease  localised tensions and draw it into a closer relationship with Brussels.

Under the leadership of Nikola Gruveski (2006-2016), corruption and state capture were endemic in North Macedonia. Gruveksi was averse to opening negotiations with mainstream governments in Greece and it was not until the centre-left Social Democratic Union of Macedonia ousted  Gruveski out of power, that there was a breakthrough. Gruveski’s successor, Zoran Zaev, capitalised on Greek Prime Minister Tsipras’s reformism to broker the controversial Prespa Agreement which settled the name dispute. Two years later, North Macedonia was finally admitted to NATO, demonstrating that Greece was the final hurdle to NATO membership.

A tamed economy

However, North Macedonia soon found that NATO membership was not a passport to joining the EU. Internal ethnic tensions have created friction with EU member states. Relations with Bulgaria soured during the election campaign for July 2020 during which the campaigns of both main political parties played on anti-Bulgarian sentiment..Zaev managed to gain power by agreeing to a coalition with the main part of the Albanian minority.  The new cabinet’s economic hurdles, specifically fiscal redistribution, could be exacerbated by renewed ethnic tensions between the Slav majority and the Albanian minority. Should tensions reach the levels of the 2001 civil conflict, the deepening of this fracture would   slow down reforms and deter investments.

Bouncing back after the fall

The Balkan countries suffered greatly during the Great Recession due to their proximity to the Greek economy at a time when Athens navigated the worst slowdown of recent history. As Greece’s second largest export partner, the RNM was particularly hard hit(Figure 3a). The region had barely entered recovery before lockdown measures crippled world economic growth. In addition, North Macedonia’s small internal market is heavily reliant  on external demand which the crisis has depleted. In Q1-Q2 2020, exports fell by 22.3% and industrial production by 14.6% compared to the same period of the previous year. Thus, GDP fell by 14.9% in Q2 of 2020 and another 3.3% in Q3 contrary to the  projected 3.2 percent growth (Figure 7). Whilst forecasts suggest growth of 5.5% in 2021, the unpredictability of the pandemic’s economic influence may yet compromise this figure.

Meanwhile, rating agencies downgraded North Macedonia’s national debt, in turn raising financing costs. the RNM’s debt was downgraded by some rating agencies, raising financing costs. Fitch, the American credit rating agency, as well as  Moody’s, another US-based credit rating agency, both value North Macedonia’s debt as a non-recommended investment asset to be reserved for short-term gain. Since May 2020 the outlook has been negative, suggesting the situation will worsen. Yet, with one of the comparatively smallest debt-GDPs of the region, these ratings are still the best in South-Eastern Europe after Bulgaria meaning the RNM has a relatively solid economic base (Figure 4).

The country’s effective response to the pandemic is in part the reason that North Macedonia is economically stronger than some of its neighbours. The caretaker government introduced a furlough scheme, worth approximately 5.5 percent of GDP, as well as a helicopter money initiative. Going forward, the government is prioritising policies that will stimulate economic growth such as slashing parafiscal charges and cutting VAT. Yet, since North Macedonia lacks the economic resources to commit to long-term reform, recovery will be slow.

North Macedonia’s Shifting Demographics

North Macedonia is contending with mass emigration in tandem with declining fertility rates  (Figure 5) — both of which reduce human capital. The official estimate of two-million residents is dubitable, with some experts hypothesising an actual figure of approximately 1.5 million. Inaccurate projections of a state’s total population jeopardises effective government decision making. In the RNM, where the resources are redistributed amongst ethnic groups pro quota, this makes fiscal management particularly difficult. If, for example, the proportion of Albanians of the total population was lower than estimated, then this group will be receiving more public resources that they are entitled to.

Given that the EU acts in a starkly-protectionist way by restricting trade with third countries, greater cooperation is in the RNM’s interest. In fact, Brussels could reduce trade barriers in the context of a stronger association with Skopje even before the latter formally joins the Union.

There are steps the government can take to encourage citizens not to emigrate . The first and most crucial step would be to improve the education system. Overall, North Macedonia spends much less of its GDP than the average EU country on education. As a result, few people complete their secondary-level education, and therefore either end up in low-paying jobs or unemployed, andare forced to emigrate for work. Another step would be investment in the underfunded Research and Development (R&D) sector. In fact, North Macedonia’s budget allocates only 0.36% of GDP to R&D, compared to an EU average of 2.2% and neighbouring Bulgaria’s 0.77%. Research and development is essential to creating high-paying  jobs, driving productivity, and boosting the economy through innovation and market competition.

Infrastructures as the drive for future growth

The silver lining in North Macedonia’s economic strategy is infrastructure development. This especially true for roads and highways. Grueveski’s administration was instrumental in the investment into road infrastructure,  starting works for two new highways in 2014.

Still, roads can be rather useless if they do lead nowhere. Thus come trade infrastructures. In addition to new road, the building of new border checkpoints and crossing points with Greece and Bulgaria, will bolster the trade infrastructure that North Macedonia shares with the EU, thereby driving trade with a global economic powerhouse. These investments will also reduce the RNM’s dependence on the Yugoslav-time north-south arteries, which currently present a barrier for the development of the “functioning market economy” that is a requirement for EU membership. To achieve this goal, the RNM needs to improve, road connections towards the west (with Albania) and the east (with Bulgaria, an important trading partner). Building better connections within the country and with non-Yugoslav neighbours will boost the country’s internal cohesion by making it easier to move from one part of the country to another proving supplemental infrastructures to foster international trade.

Figure 6 Highways represent a key segment of the RNM’s investments.

A secondary and related benefit of improving connectedness with EU trade routes is reduced economic dependence on Russia. This should reduce Moscow’s potential diplomatic leverage in future disputes in the region. As a matter of fact, pulling out of Moscow’s orbit is almost a precondition to full membership in the EU — which would bring in more funding opportunity and increase financial stability. Yet, Russia’s main asset is not trade tout court, but energy. In fact, the Balkans serve as  a strategic crossroad for oil and gas coming from Moscow and Baku through Bucharest and Ankara. Thus, North Macedonia should also consider developing its energy infrastructure as a route to closer integration with the EU. In order to reduce the Western Balkan’s dependence on Russian fossil fuels, the region needs investments. For cash-strapped countries, like North Macedonia, the opportunity to make real progress in this field may come from ‘green’ funds the EU has earmarked for energy projects in both current member states and candidate countries . In addition, Greece has established an LNG terminal on the Aegean to which links the RNM is planning to adjoin its grid. There are also talks of an electric-grid link to Albania, through which the RNM could import as much as needed and even export eventual surpluses.

Forecast: The RNM can make it… with some help

Without radical reform, the extant corruption, bureaucracy and public-sector inefficiency will stymy growth in the coming years. Luckily, the EU might be the answer to Skopje’s economic woes. The Union is expected to grant €3.3 billion to Western-Balkan countries to kickstart economic recovery following the pandemic. The package does however come with strings attached: the country will have to accelerate progress towards regulatory harmonisation with the EU. This is a notoriously difficult and resource-consuming task, which may hinder other reforms.

Furthermore, North Macedonia must confront pre-pandemic economic struggles. The government could revert to coalition infightings and therefore prolong the process of economic reform. For investors, a cautious approach is recommended, in preparation for positive economic developments.

Acknowledgments The Author thanks Charlotte Millington, parliamentary researcher at the UK House of Commons specialising in European politics and international security for her suggestions.

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How to incorporate the environment in economic ventures for a sustainable future?

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We are in the phase of world history where economic development and protection of environment must go side by side. People living in the developed part of the world will hardly want to give up their current lifestyle and people living in the developing part want to be more like the developed but in this process, we cannot separate environment from economy. Environment provides the incentive for economic growth and prosperity; providing the raw materials and resources we need for production of goods, certain climates and temperatures are required for the growth of specific plants and are very crucial to agriculture industry and the environment is what absorbs the pollution and waste we produce from all this industrialization. Protection of the environment means we mark ourselves safe from economic degradation and provide safe space for healthy functioning of economic and social activities. If we preserve the environment we control the risks of drought, heat waves, cold spells and floods, regulate the air quality, the temperature, the climate, the clean supply of water, the contamination of soil, cycling of nutrients in the ecosystem and management of carbon. Since agriculture can be regarded as the primary industry, crucial to feed people, people who then operate other industries, it is very important to safeguard the environment that feeds us and nurtures us and the environment that we live and grow in. Today, the world economy is facing serious environmental hazards. Climate change, loss of biodiversity and ecosystems are some of the global problems that need immediate collective action by states since this issue engulfs the whole of mankind. Therefore, economists and environmentalists have in the recent years taken this subject with full zest. How can economic growth and environmental protection go hand in hand? Environmental policies integrated with economic policies can be implemented and pursued by states to ensure sustained and prolonged environmental human well-being and continued simultaneous economic growth for states both at the national and international level, ending in a win-win situation.

Natural resources are salient to economic development but at present many prime resources and ecosystems are depleting which poses a grave situation for states and their economies. To tackle this concern, natural resources need to be used in a reasonable manner and adopting and improving technology be propagated in such a way that the use of natural resources is made more efficient and long lasting. Use of newer and modern product designing which meets the needs of the current times, needs to inculcated. The consumption of natural resources beyond the point that hampers economic growth also needs to be avoided. The vitality of technology and innovation in limiting environmental hazards is being stressed, this is also beneficial for businesses and industrialization. This is because preservation of environment is itself a form of economic development and growth. People who come up with the ideas and engineering for environmental friendly products; such as the water and air pollution control, treatment and purification technologies, make money and businesses out of these services, thus contributing to the economy. Similarly, wind mills and solar systems are now a multimillion-dollar business themselves. If environment protection is putting some older technologies and practices out of work, it is also creating incentives for modern technologies and creating more job opportunities in the field. States should thus, make an industrial shift to equipment and products that have a low carbon usage and efficiently use resources. In the real estate sector, places with better and healthier environment and surroundings are priced more than other counterparts for example, a building next to a park or green belt will have higher value than a property which is not next to any place green. This points to the concept of “hedonic pricing.” It refers to the difference in pricing due to the associated environmental aspects, in otherwise similar products. Better environment also contributes to the development of human capital. The presence of a green park will not only add to beauty and better air quality but it will also encourage a lot of people to physically exercise.

Due to the growing scarcity of resources, governments of the world should introduce the policy of “common property regime,” which avers that resources such as land, water, certain habitats and the atmosphere be made common property for all. The problem is that there are no property laws for these resources and people use it as a free dump for human waste and waste products from economic activities. This includes various water bodies for example, irrigation systems and canals, forests, fishing areas etc. Concise and clearly enforced rules should be put in place, exercising the limits put on some activities such as excessive fishing or cutting of forests, putting a limit on the accessibility to these resources, keeping a check on the carbon footprint of some groups, organizations or events or even putting some specifications on their use such as tax or making recycling or reuse mandatory. The shift from already existing practices to newer ones that are more environment-friendly will be costly and it will take time but it is more important now than ever and more beneficial for us in the long run. Environment policies of these sorts reframe the economic structure. The cost of using these resources should be closed in according to the social cost of putting the health of the public at risk. Restructuring of the economic and environmental structure helps a country’s economy by lessening the environmental hazards that the country might face and by making the state more buoyant and resilient in the face of these environmental changes and risks. This can also prove to be a powerful driving force for innovations and ideas.

States are often in the race to increase their GDP. GDP only measures the material values of goods and services and does not take into account the well-being of humans including the health and education quality, living standards, income and environmental conditions. Economic growth, nonetheless, is a prime force for improving human well-being and states incorporate social, political and environmental goals in the well-being domain through these economic activities. The Kuznets curve is a graph to explain the relationship between the growth in economy/GDP and the quality of environment. States can keep this model in mind while reformulating their economic and environmental policies, in accordance to the history of environmental degradation they have endured and the future remodelling they need to follow. It is characterized by an inverted U-shaped relation between GDP per capita and environmental quality. Since we have already crossed the point for environmental degradation, it is now time to think for the decline in the degradation. Initially, when the GDP grows, so does the degradation of environment but after a certain point, the increase in GDP no longer degrades the environment further. This is because at lower income levels, the income is completely spent on meeting the basic survival requirements. When the income increases to a certain point, people and states should start thinking of the bargain that material does with the environment, this should be reflected in their behavioural change. After this point, states should start giving up further unnecessary consumption and focus more on environmental rehabilitation. Another possibility seen through this graph is that industries might see profit in enhancing production quickly, but as demands are met and resources become scarcer, more green, cleaner and resource efficient technology is introduced. Societies, in this way, also go from agriculture-based economy to manufacturing-based economy and finally to service-based economies, releasing the lowest levels of pollution. An example can be of EU rules and regulations. Waste water used to get dumped directly into the streams or rivers, but now it gets treated first before releasing. There are barely any housings left in the EU now that are not connected to solid and water waste disposal and treatment networks.

If states and the firms operating in those states take up eco-innovations and eco-friendly measures, they will actually be at advantage because investors like banks and various funding institutes are more likely to invest in sustainable businesses that will stay operational a long time, than those that are dependent on the environment in these challenging times. Firms that run on eco-friendly terms will also stay ahead of the taxes and regulations charged on using environmental resources. This will prove to be very cost efficient for them and they will not have to change their action plans according to any new regulations or increases in costs. Greener and cleaner practices and equipment can also truly reduce the waste an industry produces, in turn increasing the output and ensuring sustainability. This adaptation to cleaner practices can also lead to innovations and new ideas and practices starting right from the household or individual level. UK is one of the countries that is high on the ranks of eco-innovations, thanks to general understanding and cooperation among firms to pursue sustainable development. Furthermore, statistics show that companies that are currently focusing more eco-innovations are growing at the rate of 15% annually while their counterparts that are not focusing on the same, are not enjoying any climb in their profits[1]. Most of these businesses (based in Europe) are small to medium scaled and they are adaptable in nature. They are benefitting from the European commission’s stance on promoting eco-friendly businesses. Public Relations advantages and marketing superiority is also pretty clear in eco-innovation ventures.

A commendable example of improving the environmental conditions while also not compromising on the GDP and economic development, is that of China. China has been time and again accused of having a huge carbon footprint, which directly impacts the ozone layer which is communal to all mankind. States that are not even at par with the fumes and industrial waste that China produces, are today in the list of states most affected by climate change and global warming, including Pakistan and many of the Gulf nations. China has thus taken the role of global leadership in the field of environmental protection. China has been standing true to its 2015 Paris agreements on cutting down of greenhouse emissions. It was able to do so by spreading awareness and education from the grass-root level. In the period of only a few years, China has drastically improved the air quality in many of its larger cities. Solid waste management and sorting is a major step taken to restrict illegal dumping of garbage. Restrictive policies and heavy fines are imposed if an individual breaks the rules. Renewable energy generators like the wind and solar panels, have been put to use to meet nationwide energy requirements, which ensures cost effective power. In the year 2017, China nationally introduced the concept of “National emissions trading system,” which formed a market for the buying and selling of carbon dioxide emissions allowances. It regulates the quantity of emissions and carbon footprints that an individual, firm or an event is allowed to produce. All of this simultaneously helps China to become more energy sufficient and assists economic reforms while also improving the quality of ground-level air. Some states in the USA are taking up the initiative of green or clean economy with full fervour. California for example, set a target to achieve carbon neutrality by the year 2045, while the clean energy sector is also opening opportunities for jobs. One of the incentive taken in the goal was stricter vehicle exhaust emission rules[2].Nevada also passed a legislation to increase the energy it makes to up to 50% through renewable energy sources, by the year 2030[3]. Rules and regulations have also bene proposed to reduce the emission of harmful air pollutants including those that are short-lived such as methane, CFCs and HFCs. Developing countries like Pakistan have also addressed the climate issue and the Pakistan Premier launched the “Billion Tree Tsunami” plantation campaign to curb deforestation, an issue rampant in the north of the country. In conclusion of this paper, in light of all the examples and recommendations, I would say that the long term benefits, mutual to all, outweigh the costs of taking a leap from existing economic practices to those that are eco-friendlier.


[1]“Eco-innovation for better business,” Business Green, accessed October 23, 2020, https://www.businessgreen.com/sponsored/2409410/eco-innovation-for-better-business

[2] “California Air Quality: Mapping the progress,” U.S News. November 6, 2019.https://www.usnews.com/news/healthiest-communities/articles/2019-11-06/california-air-quality-mapping-the-progress

[3]Chandler Green. “7 ways US states are leading climate action,” United Nations Foundation. May 30, 2019, https://unfoundation.org/blog/post/7-ways-u-s-states-are-leading-climate-action/

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