Causes Of Economic Conflict Economics Essay

Global restructuring leading to the integration of developing countries into the global economy can lead to increased inequality and poverty in these countries. Western subsidies and protectionism, combined with unequal trade relations within the global economy have undermined the prices of agricultural produce. In Mexico, for example, this has led to a wave of cheap, subsidized US maize flooding the domestic market, making it impossible for Mexican subsistence farmers to compete, and increasing flows of emigration from rural areas. At the same time, processes of global restructuring have led to increasing pressure on labor to become more mobile and flexible, which has resulted in growing migration flows worldwide.

Economic restructuring refers to the phenomenon of Western urban areas shifting from a manufacturing to a service sector economic base. This transformation has affected demographics including income distribution, employment, and social hierarchy; institutional arrangements including the growth of the corporate complex, specialized producer services, capital mobility, informal economy, nonstandard work, and public outlays; as well as geographic spacing including the rise of world cities, spatial mismatch, and metropolitan growth differentials [1] .

The global financial crisis, the worst since the depression of the 1930s, was unlikely to end soon. Since it began in mid-2007, the United States (us) economy has had tepid growth. Some economists say the US is currently in a recession, together with Japan and the European Union (eu). In fact, the Japanese economy shrank at an annualised rate of 2.4 per cent in the April to June quarter, while that in the eu fell by 0.2 per cent. The downturn in the developed countries has had an impact on other countries: growth in most emerging economies has slowed considerably.

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On Wall Street in the 2007 financial crisis, the paper picks up the chronology with the failure of Bear Stearns in early 2008, the rescue of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac that summer, and the failures of the investment bank Lehman Brothers and AIG the week of September 14, 2008. The run on money market mutual funds in the wake of Lehman’s collapse led to a lockup of the commercial paper market and spurred the Treasury to seek from Congress a $700 billion fund? the Troubled Assets Relief Program (TARP)?with which to pur chase illiquid assets from banks in order to alleviate uncertainty about financial institutions’ viability and restore market confidence. However, as market conditions continued to deteriorate even after the early-October enactment of EESA, the Treasury shifted from asset purchases to capital injections directly into banks, including the surviving large investment banks that had either become bank holding companies or merged with other banks. The capital injections, together with a Federal Deposit Insur ance Corporation (FDIC) program to guarantee bank debt, eventually helped foster financial sector stability. Even in late 2008, however, contin ued market doubts about the financial condition of Citigroup and Bank of America led the Treasury and the Fed to jointly provide additional capital and “ring fence” insurance for some of the assets on these firms’ balance sheets. In effect, providing insurance through nonrecourse financing from the Fed meant that taxpayers owned much of the downside of these firms’ illiquid assets.

Any further weakness in the developed economies will impact most emerging countries, especially those dependant on commodity exports.4 Already, due to the economic slowdown in the us, Europe and Japan, prices of most commodities have fallen sharply from the highs reached early this year. According to the bullish view, as the numerous corrective measures taken by the us and other developed nations begin to take effect, global financial markets – and with it the global economy- will soon revive. The bears counter that there will soon be more financial turmoil, as the housing crisis, credit contraction and losses worsen. With the balance of these opposing trends heavily tilted towards the bearish case, most economies and finan- cial markets around the world are likely to be flat or down over the next few years

STATEMENT OF PROBLEM

The world economy has gone through so much of turmoil and bad times. This has led to basic shift in the feautes of the global economy. The roles of various national which were assigned for years are now changing. The old guard is living the center stage while the new economics like China & India are taking over the world stage. This restructure in the global economy has led to many conflicts between individual countries, national blocs and international organizations. There is discontentment among the masses in these countries because majority of them have been not granted a seat on the development train. It high time that we acknowledge the problem and see to that this issued of conflicts from all corners is resolved with utmost sincerity and dedication.

OBJECTIVES

The objective of the Project are as follows:

To research on the conflicts that arising from global economic restructuring

To find the ways to resolve such dispute

HYPOTHESIS

The following are the Hypothesis that this Project is based on:

The is great and utter dissatisfaction among the masses about the establishment

The establishment is doing nothing to tackle this problem

SCOPE OF PROJECT

The project will deal with the important events surrounding the financial crisis leading to restructuring and conflicts arising especially in Western European Counties and South Asian Counties

RESEARCH QUESTIONS

Following are the Questions that this Project seeks to answer:

Is there any problem with global economic restructuring?

Are there any issues to be resolved through the global mechanism put in place and are these organizations effective?

Is there any chance of recovery from these conflicts ?

REVIEW OF LITERATURE

Global Financial Crisis: A Long Way from Recovery Author: Ignatius Chithelen

This journal article deal with financial crisis of 2007, from an individual in 2008 and the fears, pain and suffering due to integration of Economics with each other. It deals with stories of 10 individual differently skilled, situated and placed in different fores of life but still integrated and affected by one common event and suffering its consequences in the end.

Lessons for the Next Financial Crisis Author: Jeffrey E. Garten

This journal article deals with the various steps that need to be taken in order to avoid the crisis that occurred and ways o put into mechanism to safeguard individual’s form economic restructuring.

Foreign Direct Investment in India in the 1990s: Trends and Issues Author: R. Nagaraj

It deals with the Indian take on globalization for a pre-2000 period, when the insect of globalization, privatization and liberalization was just showing what wonders it can do. The Indian perspective is important to consider because it gives us an insight on what can a country on the brink of bankruptcy can do, if it has the political will and economic strength.

Restructuring in the Global Economy: The Consequences of Strategic Linkages between Japanese and U.S. Firm sAuthor: Dileep HurryR

This article analysis the grave and endless integration of these two economies and the effect these economies have on one another, due to small domestic policies of their local governments. It deals with rise in protest against such grave integration without putting proper safeguard in place.

Whilst a reasonable number of studies have been carried out in recent years that try to relate the impact of global financial crisis (World Bank 2009, Win 2009, WHO 2009, Fernandez 2010, Wright & Black 2011) relatively few focus on social capital.

Anderson(2009) has done a survey among 99 randomly selected small towns in Iowa, USA, and found that loss of social capital not only results from loss of jobs which was the results of global financial crisis, but also a variety of other negative economic shocks.

These economic crises in small towns may include a plant closing, a school closing, toxic environmental contamination, or a natural disaster.

However, there are some studies have carried out in Indonesia, Thailand, and Philippine (Grootaert 1999, Gaurav & Hoogeveen 2000) that try to relate the impact of financial crisis on social capital.

These studies have done during the period of 1997 to 2000. They found that the crisis that hit ASEAN countries in 1997 had eroded social capital in the respective countries.

Financial crisis leads to demolition of norms and social trust that knot individuals and society together. Due to different nature of financial crisis in 2008 and 1997, these studies may not reflect the common impact on social capital. Moreover, the importance of social capital may vary across countries with different cultural backgrounds.

Therefore, researchers have not yet been able to reach into a concrete hypothesis on the impact of the global financial crisis on social capital of low-income households.

RESEARCH METHODOLOGY

The research has been doctrinal, with the help of reference from the books and several articles published in distinguished law journals and web portals by recognized authors and members of economic community.

CHAPTER-2

ECONOMIC CRISIS OF 2008-2010

The actual trigger of the economic crisis of 2008 was the lax provision of credit in the US property market (in the subprime segment). This caused a boom in the market for privately owned homes. Due to the fact that the US economy made a speedy recovery from the Dot.Com crisis at the beginning of this century and had grown fast in the nineties, house and property prices have increased steadily over the past 15 years. [2] 

As house and property prices raised so did the value of the collateral security). Increasing property and share prices in turn increased consumption and employment and a cumulative process was set in motion.

Cheap loans to persons whose credit worthiness and income would under normal circumstances not are considered stable or high enough for a loan was also politically accepted. The desire was that every American, including immigrants, should be able to get their own home.

The turbulence in one segment of the American market would not in itself have been sufficient to cause such a worldwide crisis. What was surprising was the prevalence of the securitized property loans in the portfolios of banks across the whole world. International banks had bought enormous volumes and in addition had held them off their balance sheets (in special purpose companies which were not sufficiently monitored).

The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s [3] .There are many dimensions to the GFC, such as it resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market had also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies.

It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008. [4] 

Precisely due to this complexity, in the absence of empirical evidence, it will be difficult to predict with much confidence what the combined impacts of all facets of the crisis are likely to be – and how the impacts are likely to vary across the socio-economic groups and demographic groups.

Although these impacts have been distributed across all groups of income, the poor in particular seem to have suffered more due to their limited saving and to the pattern of job loss in low wage employment.

Initially, much of the attention was focused on the financial and economic aspects of the crisis. However, there was not given much attention on social aspect though the impact of the global financial crisis was also very pronounced in the social sphere.

Rising unemployment and inflation had a downward effect on real wages, while there was a rise in the incidence of poverty which turned to the erosion of social capital. The long-term implications of these problems are serious enough to warrant concern.

CAUSES OF ECONOMIC CONFLICT

Increasingly, researchers see poverty as a factor that can fuel grievances and help ignite conflict. The poor and marginalized form a pool of recruits for rebel movements, as seen in places like Sierra Leone, Sri Lanka, and Cambodia. Goodhand argues that many current conflicts originated from and are fought out in regions whose communities have limited voice and persistent poverty

Figure 2: Real GDP growth of the economies of the world

As Figure 2 shows, post-conflict countries are projected to have a substantial decrease in the economic growth, from 7.4% in 2007 to 3.1% in 2009.

Advanced economies may have a sharper slowdown (2.7% in 2007 and 3.8% in 2009), but they have well-developed social protection, and stable political systems that may facilitate the recovery and absorb the pressures for social instability and conflict.

In contrast, post-conflict countries, may be more vulnerable to a more protracted and slower recovery from the slowdown, given the higher risks of conflict recurrence.

Many Sectors in the Indian Economy got affected by the global Economic Crisis. Some of important sectors that have the potential of inciting conflict are:

Information Technology: With the global financial system getting trapped in the quicksand, there is uncertainty across the Indian Software industry. The U.S. banks have huge running relations with Indian Software Companies. A rough estimate suggests that at least a minimum of 30,000 Indian jobs could be impacted immediately in the wake of happenings in the U.S. financial system. [5] 

Investment: The tumbling economy in the U.S is going to dampen the investment flow. It is expected that the capital inflows into the country will dry up. Investments in mega projects, which are under implementation and in the pipeline, are bound to buy more time before injecting funds into infrastructure and other ventures. The buoyancy in the economy is absent in all the sectors. Investment in tourism, hospitality and healthcare has slowed down. Fresh investment flows into India is in doubt.

Real Estate: One of the casualties of the crisis is the real estate. The crisis will hit the Indian real estate sector hard. The realty sector is witnessing a sudden slump in demand because of the global economic slowdown. The recession has forced the real estate players to curtail their expansion plans. Many on-going real estate projects are suffering due to lack of capital, both from buyers and bankers. Some realtors have already defaulted on delivery dates and commitments. The steel producers have decided to resort to production cuts following a decline in demand for the commodity.

Exports: The crisis will sharply contract the demand for exports adversely affecting the country’s growth prospects. It will have an impact on merchandise exports and service exports. The decline in export growth may sharply affect some segments of the Indian Economy that are export- oriented.

The slowdown in the world economy has affected the garment industry. The orders for factories which are dependent on exports, mainly to the U.S have come down following deferred buying by big apparel brands. [6] 

Increase in Unemployment: One danger is of a dip in the employment market. The global financial crisis could increase unemployment. Layoffs and wage cuts are certain to take place in many companies where young employees are working in Business Process Outsourcing and industry is a large employment intensive sector.

Once, industrial sector is adversely affected, it has cascading effect on employment scenario. The services sector has been affected because hotel and tourism have significant dependency on high-value foreign tourists. Real estate, construction and transport are also adversely affected. Apart from GDP, the bigger concern is the employment implications.

A survey conducted by the Ministry of Labour and Employment states that in the last quarter of 2008, five lakh workers lost jobs. The survey was based on a fairly large sample size across sectors such as Textiles, Automobiles, Gems & Jewelry, Metals, Mining, Construction, Transport and BPO/ IT sectors. [7] 

Employment in these sectors went down from 16.2 million during September 2008 to 15.7 million during December 2008.Further, in the manual contract category of workers, the employment has declined in all the sectors/ industries covered in the survey. [8] 

Impact on Industrial Sector and Export Prospect the financial crisis has clearly spilled over to the real world. It has slowed down industrial sector, with industrial growth projected to decline from 8.1 per cent from last year to 4.82 per cent this year [9] .

The service sector, which contributes more than 50 per cent share in the GDP and is the prime growth engine, is slowing down, besides the transport, communication, trade and hotels & restaurants sub-sectors. In manufacturing sector, the growth has come down to 4.0 per cent in April-November, 2008 as compared to 9.8 per cent in the corresponding period last year. [10] 

Sluggish export markets have also very adversely affected export-driven sectors like gems and jeweler, fabrics and leather, to name a few.

For the first time in seven years, exports have declined in absolute terms for five months in a row during October 2008-February 2009.

Impact on poverty: The economic crisis has a significant bearing on the country’s poverty scenario. The increased job losses in the manual contract category in the manufacturing sector and continued lay-offs in the export sector have forced many to live in penury.

The World Bank has served a warning through its report, “The Global Economic Crisis: Assessing Vulnerability with a Poverty Lens,” which counts India among countries that have a “high exposure” to increased risk of poverty due to the global economic downturn. Combined with this is a humanitarian crisis of hunger.

The Food and Agriculture Organization said that the financial meltdown has contributed towards the growth of hunger at global level. At present, 17 per cent of the world’s population is going hungry.

India will be hit hard because even before meltdown, the country had a staggering 230 million undernourished people, the highest number for any one country in the world. [11] 

2.3 CAUSES OF CONFLICT OTHER THAN GLOBAL ECONOMIC CRISIS

Does inequality of opportunity matter for economic growth (apart from just offending one’s sense of social justice)? Of course it does, if one keeps in mind that barriers faced by the poor in land and capital markets and in skill acquisition and in coping with risks sharply reduce a society’s potential for productive investment, innovation, and human resource development.

They often block the creation of socially more efficient property rights (for example, in land tenure) and investment in high-risk but high-return innovative projects. Inequality that keeps the work force largely uneducated and unhealthy cannot be beneficial for private business, apart from the law and order problems that inequality-generated conflicts may bring about.

Moreover, institutional structures and opportunities for cooperative problem-solving are often foregone by societies that are highly polarized. Equity and efficiency thus often go together, contrary to the opposite presumption of much of mainstream economics.

In India considerations of equity have often been used as an excuse for all kinds of regulatory excesses. In the name of helping the poor and the small farms and firms many restrictions on private initiative and on capacity expansion and many programs of government subsidies and handouts have been launched in the past and, under the pressure of vested interests, prolonged indefinitely.

Economic reformers have rightly pointed out that most often these policies and programs did not help the poor (and there certainly exist more cost-effective ways of helping them), while distorting the economic incentives for enterprise and investment and protecting the rental havens of politically well-connected oligarchies.

In other words, they helped the cause of neither efficiency nor equity. What financial columnists are quick to describe as anti-reform populism is partly a product of the manifold inequalities and conflicts of Indian society. The severe educational inequality, for example, makes it harder for many to absorb the shocks in the industrial labour market, since education and training could provide some means of flexibility in adapting to market changes.

In China the disruptions and hardships of restructuring under a more intense process of global integration were rendered somewhat tolerable in the 80’s and 90’s by the fact that China has had some kind of a minimum rural safety net, largely made possible by an egalitarian distribution of land cultivation rights in 1978-79. [12] 

In most parts of India for the poor there is no similar rural safety net. So the resistance to the competitive process that market reform entails is that much stiffer in India. This is in line with a phenomenon all over the world: resistance to globalization is stronger in general in countries where social safety nets (particularly unemployment benefits and portable health insurance) are weaker (compare Scandinavian countries and US in this respect). [13] 

Of course, in the last two decades the old rent-sharing equilibrium (among business houses, the salaried and rich farmers) has changed somewhat and tilted in favor of capitalist business. The hegemony of the latter is reflected in the more general acceptance of pro-business policies and reform in trade and industrial policy without a great deal of opposition in policy circles.

While infrastructure remains a bottleneck, there is a more general consensus on the other major public good, i.e. macro-economic stability, as a pre-condition for economic growth.

While inflation control has remained high on the public agenda, there has been less agreement on a whole range of other reform, particularly relating to the factor markets (labor, land, electricity, etc.) and on fiscal subsidies and rent-sharing with the newly emerging social groups.

Unlike in the case of delicensing or tariff reform, in reform of the job security laws in the labour market or of the procedures of acquisition of agricultural land for industrial, commercial or mining use or in charging market prices for electricity, the life and livelihood of a very large number of people are involved, and we know from the literature on collective action how it is rendered difficult when it involves large-sized groups with conflicting interests and with weak mechanisms for transmission of information to the central decision-makers [14] .

There are two kinds of collective action problems. One relates to sharing the costs of bringing about change (the ‘free-rider problem’); the other relates to sharing the benefits (the ‘bargaining problem’) [15] .

Over the years both of these collective action problems have become more severe in the Indian polity. As more and more of hitherto subordinate social groups have come up to be politically important particularly at the state level (in a welcome expansion of political equality and democracy in India), the sources of demands on the polity have become more diverse.

In the first two decades after Independence the massive country-wide organization of the Congress Party used to coordinate the transactional negotiations among different groups and leaders in various parts of the country. That once-mighty organization has fallen into disarray.

The proliferation of small and regional parties and their increasing importance for the survival of coalition Governments at the center have often meant that catering to particularistic demands overrides coordination for the long haul.

CHAPTER-3

EFFECT OF THE GLOBAL FINANCIAL CRISIS IN INDIA

The Global Financial Crisis had a negative impact on social capital of low income households in India descriptive analysis was performed. The study conducted by FICCI shows that the financial crisis caused a multiplicity of diverse social effects [16] . Child labour increase has been featured as a principal social effect of the financial crisis.

The financial crisis mainly affected the lower income households. The poor families who were struggling to make their means to meet their family expenditure were forced to send their children to labour markets to augment their drastically eroded income as the result of falling wages and job losses. Moreover, poor households took back their children from schools to reduce the cost involved in schooling.

On the other hand, the employers were inclined to employ children for some reasons such as, saving on compulsory government provident fund (EPF). In addition, they did not need to pay for sick or annual leaves, and paid low wages to them.

Mental stress ranked the fourth as most frequently encountered social effect experienced by the households. As many as 453 households (22.7 percent) experienced mental pressure resulted from the financial crisis. The depression and anxiety were most probably caused by several problems such as declining income, increasing prices, work pressure, family problems, declining business, etc. that households faced during the crisis.

An increase in incidences of fraud and cheating had also been reported. Most of the respondents reported cheating by employers, middlemen, friends, customers and seller/businessman etc. The total number of households who were victims of fraud and cheating was 105 making up 5.3 percent of all of the households interviewed. The financial crisis had also reduced the households’ access to financial facilities by 8.0 percent.

Commercial banks and financial institutions became extremely conservative in extending credit and a disruption of normal financial intermediation was materialized due to huge depreciation and rising interest rate. As a result many became bankrupt and business firms were brought to close down.

In the case of migration, 162 (8.1 percent) households out of 2000 households were reported to migrate between states, cities, towns etc. Households’ incidences of migration in and out were 2.9 percent and 5.2 percent, respectively. Retrenchments and attempts to look for a job elsewhere were reported as the cause of out-migration.

Financial and family problems forced household heads to migrate to urban areas, firstly to search for new jobs primarily in the informal sector and secondly, to take advantage of the availability of subsidized foods and the social services. Moreover, migration had been reported as a means of joining family members, relatives or friends to share living. On the other hand, some households migrated to rural areas to work on family farms.

Thus the financial crisis had caused both rural-urban and vice versa migration. The impacts of financial crisis on other dimensions of social capital were relatively small. These include switched political party affiliation (2.2 percent), drug abuse (0.5 percent), declined transfer receipts (4.8 percent) and racial conflict (0.1 percent). Overall nearly two-third of the sample, 65.3 percent of households was reported to face social capital constraints while the rest had not encountered it. So the results of the descriptive analysis indicate that the erosion of social capital resulted from the global financial crisis had embedded in the society.

Table 1: Social Capital Erosion suffered by households

Drivers of any armed conflict is economic conditions (low income, slow growth, and especially severe economic downturns) are correlated with the outbreak of conflict, with some evidence strongly suggesting that the causal direction runs from economic conditions to conflict [17] .

RESPONSE TO THE CRISIS BY INDIA

The Government launched three fiscal stimulus packages between December 2008 and February 2009. These stimulus packages came on top of already announced expanded safety-net programs for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission Report, all of which added to stimulating demand.

The combined impact of these fiscal measures is about 3 per cent of GDP.

There are several challenges in the direction of implementing the fiscal stimulus packages,

particularly stepping up public investment;

revival of private investment demand;

unwinding of fiscal stimulus in an orderly manner;

maintaining the flow of credit while ensuring credit quality;

preserving financial stability along with provision of adequate liquidity;

and ensuring an interest rate environment that supports the return of the economy to a high growth path.

It is believed that the fiscal and monetary stimulus measures initiated during 2008- 09 coupled with lower commodity prices will cushion the downturn by stabilizing domestic economic activity. On balance, real GDP growth for 2009-10 is placed at around 6.0 per cent. Inflation,