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China’s Economic Recovery: A Mere Façade

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It would not be too far from the truth to say that China is not all that it says it is. Many of its military and diplomatic actions have gone against norms and messages propagated by its own government. Retracting its own statements and even concealing the truth comes naturally to a government that maintains a monopoly over all information in circulation within the country as well as that which leaves it. Recent statements from the Chinese government have painted a colorful picture for the coming months, with it soon to “regain the economic growth it lost” and maintain its internal strength. How much truth can actually be accorded to such a statement though? Is China’s economy truly in a good shape or is such a statement to be seen as a mere façade, shadowing a highly unstable country?

If recent trends emanating from the country were to be analyzed, one could indeed point to the latter. At the beginning of the year, China’s economic growth had already begun a steady decline, falling to its lowest in 27 years, a mere 6 percent in the 3rd quarter of 2019. Predictions during the time, from both within and outside, projected the growth rate to fall further, with an economist at the Chinese Academy of Social Sciences predicting a drop below the annualized 5 percent. Additionally, reports questioning the accuracy of the data released by China have also emerged. China’s national accounts are based on data collected by local governments who are rewarded for meeting growth and investment targets. In this regard, it has become apparent through outside observation as well as internal admittance that many of China’s provinces have had an incentive to skew local statistics, some by nearly 20% a few years ago.

Such manipulation of data can have serious ramifications on the calculation of national data, especially since China’s GDP is based on input data rather than real performance. It is also to be noted that in addition to local governments manipulating data, there is a discrepancy between underlying economic activity and GDP figures, which has allowed the government to ignore bad investments and project only the figures it approves off. Based on such an understanding of the Chinese economy, reports from 2019 show that both GDP as well as GDP growth in China are far below official predictions and statements. It must also be understood that the Chinese government itself has always had an incentive to project greater growth during its developing years. Claiming higher growth rates and lying about recessions has allowed China to retain or even increase investment. With that being said, it has become increasingly evident that the statistics and figures released by China cannot be wholly relied upon.

While the above highlights the concealing factor behind China’s economy, it also points to the possibility that China’s economy is currently in a bad state. With the shuttering of businesses across the country, it is evident that the Covid-19 crisis dealt a devastating blow to China’s already floundering economy. Reports published by China’s National Bureau of Statistics in April showed that the country’s GDP had fallen by 6.8 percent, a contraction the likes of which, China has not seen since at least 1992. However, with lockdown measures now ending and policymakers stepping up stimulus to combat the massive economic shock, the country is now set to return to a modest growth rate according to its government. This may be true as China has begun on a path of recovery, however, its economy may have to face another looming crisis soon.

Over the past few months, it has become increasingly evident that not only is foreign investment fleeing the country but there is increasing unrest among local investors as well. China’s economic downturn which began with the trade war and culminated in the COVID-19 economic crisis has frightened investors across China. Since the beginning of the trade war with the US, many international companies have begun shuttering business and departing from the country. The pandemic has seen that number only increase over the past few months with potentially disastrous economic outcomes. Additionally, fears within China have surfaced as well, with many attempting to send their capital abroad. The recent political turmoil now plaguing Hong Kong is also reviving fears over massive capital outflows from the country. China’s new national security bill and the retaliation promised by the US and others has stoked significant concerns. The first instance of this is seen in the immediate aftermath of China’s announcement of the Bill on May 22 when Hong Kong’s benchmark for local stocks plunged by 6.9%. Essentially, with tensions rising, further turmoil and capital flight may soon be in the cards.

Only time will tell whether the government will be able to reduce the possibly disastrous consequences of such capital flight or even reverse the same. In 2015, when similar fears of capital flight occurred, it spurred the country to spend nearly US$1 trillion of its reserves. However, with the current economic downturn in China, it would be highly unlikely that the Chinese government will be able to muster the funds needed in countering such consequences. The Chinese government has seemingly taken cognizance of this fact though and has therefore introduced measures aimed at ensuring Chinese investment and capital remains within China. Not only has China already put a cap on the amount of money allowed to leave the country but also cracked down severely on its underground banking system. Additionally, the government has been attempting to woo the fleeing investors back with promises of economic stability and recovery. China’s current projection of post-pandemic recovery and growth must therefore be viewed through a critical lens, and seen as merely a tool through which it attempts to influence and reassure investors.

On the government’s attempts at ensuring investment though, it has not merely acted in the field of rhetoric and promises though. Since the beginning of last year, the Chinese government has put a cap on the maximum amount allowed for withdrawal from its economy. According to new rules, individuals will only be allowed to withdraw a maximum of the equivalent of around $15,000 and carry transactions up to only $50,000 abroad in a year. Any Chinese citizen found to be withdrawing in excess of that amount will be barred from making any withdrawals for two consecutive years. Additionally, any Chinese citizen leaving China with an excess of RMB 20,000 in cash require a permit issued by the bank that provided the same. In enforcement, the State Administration of Foreign Exchange (SAFE) has already begun its crack down on capital flight. In November of last year, the agency fined Chinabank Payments $4.2 million for moving money overseas. In the following month, SAFE fined the Bank of China $6,000 for breaking a government rule and allowing a customer to withdraw over $50,000 in cash according to reports. One can be sure that the situation in China is indeed serious, when its government has become overly concerned over a mere $15,000 being withdrawn from the economy.

This concern has also been extended to the new surge in China’s underground banking system. China, in its efforts to counter threats to its economy, has begun a serious crack down on all capital outflows, whether legal or illegal. The Supreme People’s Court recently introduced stiff penalties for any and all illegal currency exchanges. According to new rulings, the government will introduce jail terms of five years or more for those operating ‘underground banks’, which currently facilitate illegal foreign exchange and cross border trading. Through this process, the Chinese government has effectively sought to stop tens of thousands of Chinese from funneling millions out of the country through these services. Since the government has put a cap on the amount of money being withdrawn from the country, people have sought other mechanisms through which they can transfer funds overseas, either for the purpose of investing in property or making other significant foreign exchanges.

The requirement for such mechanisms has motivated the creation of an Informal Value Transfer System (IVTS) known as ‘Underground Banking’. The IVTS involves the transfer of funds to a bank account controlled by a Chinese IVTS provider who then transfers the same into an account of the remitter’s choice. This allows for the transfer of large amounts of funds out of the country without the knowledge of the Chinese government. The stiff penalties now being imposed on such transfers are once again indicative of the governments need to retain capital within its own economy. Any large capital outflow can result in a fall in exchange rates, negative spiral of declining confidence and finally, no buffer for government debt. For a country currently facing a debt to GDP ratio of nearly 300%, capital outflows could result in serious consequences for its economy, especially during a time when mechanisms like the IVTS has seemingly gone into overdrive.

The government is currently doing everything within its power to paint a picture of recovery, provide opportunities for investment and crack down on individuals attempting to evade its rules and directives. While the crackdown on capital outflows and underground banking is evident, there has also been significant actions taken on the digital currency front. Within China, there has been a surge in both the transaction as well as mining of Bitcoins over the past few years. Many experts have stated the need for three factors in ensuring effective cryptocurrency mining, i.e. low-cost electricity, colder weather and reliable internet. The availability of all these factors in China has facilitated massive incursions into the usage of cryptocurrencies, with reports showing between 35-37 variants of the same currently available in the country.

With the property market currently being viewed as inflated and the stock market as a scam, cryptocurrencies provide an alternative to Chinese citizens who wish to make investments that are not riddled with problems or subject to government scrutiny. Many middle- and upper-class Chinese have thus begun making investments and transactions through Bitcoins and other cryptocurrencies. With the government being unable to shutdown Bitcoin accounts or monitor transactions made through the same, this mechanism effectively allows individuals to subvert it. It is estimated that this medium alone has accounted for transactions ranging in billions of dollars over the past few years. With the Renminbi (RMB) essentially losing its transactional value, the number of people now adopting these mechanisms has seen a significant increase, putting the government on alert. However, the only action the government can undertake in this regard, is accelerate the launch of its own sovereign digital currency and hope its citizens will give up on Bitcoins and other cryptocurrencies (a highly unlikely prospect).

It is evident that the government in China may soon have an economic crisis on its hands, one which it may be unable to counter. Extremely high debt to GDP rates and possibly massive capital outflows has put the government in a precarious position. It has therefore sought to curb high debt and also put out reports that its digital currency would be a game changer for Asia, allowing for more RMB demand in the region. Undoubtedly these reports are another one of its propaganda activities, aimed at retaining investment. According to reports, China’s economy will face two major shocks, a pandemic stimulus and a post-pandemic economic fallout.

It must also be noted that China depends on the global economy for its own recovery and if this does not occur soon enough, its economy will have to face serious consequences. The reasons for this are manifold. Most importantly, China, the world’s largest exporter, relies on the United States, Japan, South Korea and others for its economic activity. Exports to the US, are currently facing a shortage of demand as well as disruptions across global supply chains. Additionally, China needs to ensure continued implementation of its Belt and Road Initiative in order to continue a majority of its overseas economic activity. Currently, from Europe to Asia, trade as well as infrastructural projects across the BRI, which accounts for around 17 percent of China’s exports, have been put on hold.

It has therefore become apparent that China’s economic growth is not all that it would seem. While it is the second largest economy in the world and has shown spectacular growth in the past, it would seem like China’s glory days are behind it. Forces that once drove China’s economic growth are now withering. China’s economy can no longer rely on a trade surplus or foreign investment to boost growth and will probably see increased capital outflows in the coming months. Additionally, China is now on the verge of a debt crisis and the massive foreign reserves it has repeatedly used as stimulus in the past have been slowly declining. In this context, it is imperative to question the narratives propagated by the Chinese government. If the Chinese economy is truly on the path of economic recovery, then why has there been an increase in the lack of confidence shared by its own civilians? And if such are the woes facing the country, is the future of its’s economy truly as promising as it’s government would have the world believe? One would think not.

Zeus Hans Mendez is a Research Associate and Centre Coordinator at the Centre for Security Studies (CSS), Jindal School of International Affairs, O.P. Jindal Global Univeristy. He is also a Research Assistant at the Centre for Security and Strategy Studies (CeSCube).

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

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Northern Dimension

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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North Macedonia’s Journey to the EU

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macedonia

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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