Politics of Global Economic Relations
Politics
of Global Economic Relations
Introduction
Politics of global economic relations is all about
apprehending the nature of the global economic system. This course offers an
introduction to the political and economic relations among countries and
international organizations in the global system. Within the broader
family of international relations, international political economy (IPE), or politics
of international economic relations, is the primary concern of the interactions
between political actors and economic forces in the global system. Scholars in
the field of international political economy have divided it into several
parts, including the international trade system, theories that explain
economic relations, globalization, multinational corporations, economic
development, the international monetary system, etc. The class is intended
to help students appreciate how each division (though they all tend to work in
tandem in the global economy), shapes global economic relations.
Topic 1. Conceptual
Clarification
Growth and Development – It has no general
definition. Most Western liberal scholars equate development with economic
development, they feel development is just about growth, rate of GNP, BOP etc
whereas it is not so.
After WWII, scholars such as Paul Baram, Samir
Amin etc raised arguments that PCI, GNP etc does not approximate development as
mere statistical postulations does not for instance reflect the disparity of
income between the lowest 10% of population for instance and the highest 10% of
the population.
Also, it is possible to have increase GDP
without real development because the goods and services been produced may not
be satisfying to the population whose development is been worked out e.g
Columbia’s economy may be said to be booming but the narcotic production that
dominates the economy is not at best satisfying.
Development
is a complex issue, with many different and sometimes contentious definitions.
A basic perspective equates development with growth. The United Nations Development Programme uses a more detailed
definition - according to the UN,
development is ‘to lead long and healthy lives,
to be knowledgeable, to have access to the resources needed for a decent
standard of living and to be able to participate in the life of the community.‘
Basil Davidson in ‘Can Africa Survive? Arguments against
Growth without Development’ distinguished between growth and
development. To him, growth is the extension of existing structures while
development is the qualitative change of existing structures into a different
and more advanced structure.
Femi Mimiko in ‘The
Global Village’ defines development as the progressive
increase in the general standard of living of the people while he sees growth
as the expansion of production activities.
A
country's economic growth is usually indicated by an increase in that
country's gross domestic product, or GDP. Generally
speaking, gross domestic product is an economic model that reflects the value
of a country's output. In other words, a country's GDP is the total monetary
value of the goods and services produced by that country over a specific period
of time.
Example
For
example, let's say that a special berry grows naturally only in the country of
Utopia. Natives of Utopia have used this berry for many years, but recently, a
wealthy German traveler discovered the berry and brought samples back to
Germany. His German friends also loved the berry, so the traveler funded a
large berry exporting business in Utopia. The new berry exporting business
hired hundreds of Utopians to farm, harvest, wash, box and ship the berries to
grocers in Germany.
In
one calendar year, the berry exporting business added over one million dollars
to Utopia's GDP because that's the total value of the goods and services
produced by the new berry exporting business. Since Utopia's GDP increased,
this means that Utopia experienced economic growth.
Now
let's take a look at economic development. A country's economic
development is usually indicated by an increase in citizens' quality of life. 'Quality of life' is often measured
using the Human Development Index, which is an economic model that
considers intrinsic personal factors not considered in economic growth, such as
literacy rates, life expectancy and poverty rates.
While
economic growth often leads to economic development, it is important to note
that a country's GDP doesn't include intrinsic development factors, such as
leisure time, environmental quality or freedom from oppression. Using the Human
Development Index, factors like literacy rates and life expectancy generally
imply a higher per capita income and therefore indicate economic development.
Example
of Economic Development
For
example, before the berry exporting business, most Utopians lived in small
villages many miles from one another. Few Utopians had access to schools, fresh
water or healthcare. Utopian men worked long hours attempting to farm land that
was naturally unsuitable for most crops, just to feed their immediate families.
After
the berry exporting business, many Utopians found work through the new
industry. Newly employed villagers relocated closer to the business, giving
them better access to schools, healthcare and fresh water produced for the
plant and surrounding areas. Most Utopian men were able to trade
labor-intensive hours in the fields for easier eight-hour shifts. Besides
earning a salary, the new work enabled them more leisure time and contributed
to longer life spans. Thus, Utopia experienced economic development through
economic growth.
Underdevelopment
Underdevelopment
does not literally apply as a complete absence of development because the basic
ingredient of development is present in every human society. The basic
ingredient is the means of meeting basic human needs for survival.
Underdevelopment
is used in two ways. One, it is used as an instrument of comparing or
measurement between two or more levels
of development and two, it is used to express the basic fact of exploitation of
one economy by another economy. This can be as a result of exploitation of peripheral states by
the core states.
Some
methods of knowing it is:
-
The
presence or absence of infrastructural facilities
-
Level
of calorie intake
-
Acute
political instability
-
Low
level of security
-
High
illiteracy level
-
Little
amount of industrialization
-
Low
energy consumption
-
Brain
drain
-
Structural
dependency of an economy, etc.
Dependence – Claude Ake “an economy is dependent to
an extent that its position and relationship to other economies in the
international system and the articulation of its structure make it impossible
of development” This means that an economy that is not dependent must be one
that is internally generated.
Neo-Colonialism – Nwalimu Julius Nyerere “The essence
of neo-colonialism is that the state which is subjected to it, is in theory
Independent but its economic system and thus, its political system is directed
and controlled from outside”.
Imperialism – The exploitation of the resources of
one nation by another through one form of domination or another.
Capitalism, Socialism …….
Exchange Rate - The rate a nation exchanges its currency
for another stable currency.
Integration and Globalisation processes of International Economic
Relations
Integration, stress a point of economic integration, which is
joining economies by processes of eliminating barriers to economic trade and,
by building its institutional bases. Moreover, economic integration should be
treated like a process, in which there are changes, not only inside structure
integrating countries, but also between them. As a result of this process, a
merge of separate elements goes, what leads to creation a new economic
organism.
Phenomenon of economic integration, understood as compilation
and joining, appears along with a progress of commodity – monetary economy. At
the beginning, integration got a form of joining different branches of economic
activity in some regions. The next stage was joining regions – that is how,
integrated national economies started. Then, economies of different countries –
by creation thicker and thicker net of economic relations – begin to merge, and
create, this way, the world economy.
At the turn of the 20th
and the 21st centuries, it is difficult to overestimate an influence
of integrative processes on the global
economy. An effect of mentioned processes on national economies, is also seen
in every aspect of economic life. Integration became this factor, which has an
essential meaning, to make economic decisions for national economies, as well
as, for international ones. A majority of countries join integrative processes
with liberalization of commerce, not ignoring, an important globalization
process.
In an analysis of an economic aspect of integration, there
are two tendencies: traditional modern one. The traditional analysis of
economic integration, is based on classical and neoclassical theories of
international exchange. The first of them, is Ricardian’s law of comparative
advantage. It is based on advantages from specialization. This theory is based
on different production equipment factors and different level of activity of
two countries. A known description of this theory is an example of England,
where labor costs of cloth are smaller and Portugal, which makes cheaper wine.
Barter trade between these two countries lead to a situation, when they
concentrate on production of goods, made more effectively (England – cloth,
Portugal – wine). This way,
international exchange allows getting comparative profits [33, p.741, 742].
Neoclassic theory – Heckscher – Ohlin – says, about uneven equipment of two
countries with production factors. As a result, both countries have fulfilling
structure of production – complimentary, which is good to lead international
trade [2, p. 17]. These two theories build a base to define an economic
integration, in such called traditional way.
A modern attitude to the economic integration, shows fully
changes, which were made in the theory of international trade. Economists, not
only stress a need to eliminate various barriers in trade exchange, but also
say about necessity to assure a free flow of production factors between a group
of countries. An example of such an attitude, is the definition of A.
Budnikowski, who treats economic integration like a process of liquidation
limits in flow of goods and production factors, and creation similar conditions
of competition.
Besides, an economic
aspect of integration in the literature of a subject, concerning the
international integration, you can find political science interpretation of
this phenomenon, the most important are ; functionalism and neo -
functionalism. A founder and main representative of functionalism was D.
Mitrany. He looks for ways to prevent international conflicts, besides he wants
to set sources of cooperation between countries. According to a conception of
functionalism, Politics is inseparably with a power and is special for a
concrete country. While, economy has an international character, it is a base
for cooperation between societies.
Approach of national
economies goes by, such called spillover effect. This means that, starting
cooperation in one branch, draws a necessity of cooperation in other zones –
integration accelerates it automatically.
The second political
theory is neo-functionalism. Its main representatives are E. Haas and L.
Lindberg. On a contrary to functionalism, they support a regional integration
and joining, as a result of spill effect, an economic integration with a
political one.
Conditions of the
international economic integration
For initiation and a right course of process of international
economic integration, it is necessary
to fulfill a few basic conditions. The most important condition is a
real, or at least potential (possible to achieve while realizing)
complementarity of economic structures of countries heading for the economic
integration. Economic complementarity of different countries, compared to each
other, shows a level, in which work division between them makes it easier for
the economic progress of each of them. According to it, countries with a
similar structure of production, are little complimentary.
The second necessary condition for the process of integration
is existing a right technical infrastructure, allowing countries to make trade
sales. It is mainly a question of the right communication, transport or
telecommunication connections, which enable the flow of goods, services,
capital, information and, such called social-psychological infrastructure,
understood as a level of acceptation of an idea and results of integration by
citizens.
The third, important equally, although not always absolutely
necessary condition, is pro integrative economic politics of countries, heading
for integration, and accompanying creation some institutional-organizational
structures, supporting this politics, in form of free trade zone, customs
union, common market or economic union. Pro integrative politics includes
actions, which enable and make easier, intensification of trade and services,
and stimulate a transfer of production factors. Two of the mentioned conditions
– complementarity of economic structures and the right infrastructure – are
necessary to make the process of international economic integration successful.
Not fulfilling them causes, that the process of integration is practically
impossible. The third condition – the pro integrative economic politics, is not
an enough one, but, at the same time, is not the necessary condition. This
means, that not fulfilling it, does not have to mean, that the integration
cannot be done.
Targets of Economic
Integration
There are two kinds of targets of the integration: economic
and political ones. The main economic target is: progress of economic effectiveness, and in a
consequence, economic development, which a synthetic factor is an increase of the
national product and income. While, to the more analytical targets, we can
count:
modernization
of economy, by leading structural changes in production zone;
free flow of goods, services, labor force and
production factors, easy access to outside production factors, that means
natural sources and technical knowledge;
free access to foreign markets,
reaching
profitable prices in import and export,
progress of specialization and cooperation in
production,
lower costs of technical progress and its higher
dynamics.
Also the second group of targets - political ones portrays
the quantum of power that comes with the size presented by an integrated
entity.
Globalization of modern
international economic relations
Globalization is a processes of fundamental change taking
place in world economies and based on information and development of new
technologies. It influences and intensifies connections among countries and
involves virtually all sectors of economic activities.
According to scientists, globalization is a term, not only
hard to define, but it is also difficult to provide the exact date of its
beginning. Despite that fact, some of them conduct attempts to do it. Lord
Dahrendorf claims that this date is the 20th of July 1969, when the first man
reached the Moon and saw the Earth as a whole. This thesis explains that
despite the Earth's diversity, it is still a uniform planet. The term
"globalization" was made popular by Marshal McLuhan (Canadian
Sociologist) in the sixties when he spoke of the ‘global village’.
There are many definitions of globalization, but there is
still the lack of a standard one, which would fulfill its task in different
scientific environments. Therefore there is a need of presenting a few
definitions which treat globalization from the economic point of view.
According to Anthony McGrew, the British economist who compiled a popular
definition, "globalization is a process (or set of processes) which
embodies a transformation in the spatial organization of social relations and
transactions, generating transcontinental or interregional flows and networks
of activity, interaction and power In
sum, "globalization can be thought of as the widening, intensifying,
speeding up, and growing impact of world-wide interconnectedness. By conceiving
of globalization in this way, it becomes possible to map empirically patterns
of worldwide links and relations across all key domains of human activity, from
the military to the cultural [www.polity.co.uk/global/default.htm ]. The other
definition was provided by UNCTAD, which says that globalization refers both to
an increasing flow of goods and resources across national borders and to the
emergence of a complementary set of organizational structures to manage the
expanding network of international economic activity and transactions. Strictly
speaking, a global economy is one where firms and financial institutions
operate transnationally - beyond the confines of national boundaries
[www.unctad.org]. The synthesis of most definitions is the approach of Anna
Zorska, who claims that globalization is the world long-lasting process of
integrating more and more countries
economies over their borders, as the result!
Globalization's
characteristics
In order to better understand the globalization process, it is necessary to introduce its main
features:
multidimensional
character - manifests itself in many aspects of social life, in economy, in
politics and also in culture. In globalization process, there are different
actions, conducted at the same time;
complexity -
globalization consists of a huge amount of sub-processes, spread allover the
world, which create the exact structure. There are four main processes in the
world economy: the decrease of USA's domination, financial market development, globalization of
companies' activity, ecological problems;
integration - connecting activities run on different levels:
economies, markets, and companies by trade, agreement and investment
connections;
international
dependence - the development of a particular entity depends on its activities
run abroad and their success. This dependence can become one way dependence on
a stronger foreign partner;
connection with the progress of science, technology and
organization -economies modernization, development of new production branches,
increase of high qualified labor and new technology play a crucial role in the
long-lasting globalization process. At the same time, globalization accelerates
the technological progress;
compression of time and space - the "world
shrinking" phenomenon is the result of science and technology development.
It is seen in the labor migration, products coming from all over the world,
possibility in taking part in world's events (Television, Internet) and in the
fast products' and services' delivery processes;
dialectical character - clashing of processes and opinions
which have opposing character: globalization - regionalism, integration -
de-integration;
multilevel character - the world economy is the highest
level in the hierarchy, economy's branches, markets, companies, assets,
products and services are lower in this hierarchy;
international range - extension of activities to the
international and worldwide level. Some
scientists list also other distinctive features of globalization, which are
presented below:
the creation of a global financial market - as the result
of liquidation of obstacles and difficulties in capital flows;
institutionalization of foreign trade - foreign trade is
controlled by such institutions like: World Trade Organization (WTO), General
Agreement on Tariffs and Trade (GATT),
International Bank for
Reconstruction and Development
(IBRD) and International Monetary Fund (IMF);
MacDonaldization - global unification of needs according to
some products and services, especially in the food industry, electronics and
car branches;
sudden increase of Foreign Direct Investments FDI flows -
in 1990's their growth exceeded 4 times the growth of world export;
domination of transnational corporations in the global economy – which are the
main entities of the globalization process;
geographical
disjunction of the value added chain in the global scale – setting the part of
chain (production of part of final product) in the place where the ratio of
expenditures to effects is the most favorable;
creation of knowledge based economy - huge capital
investments in Research and Development (R&D) activities;
creation of the fourth economic sector - traditionally, the
economy was divided into three
sectors: agriculture, industry and services. Nowadays services are
divided into further two
sectors: traditional services
and intellectual services. The tasks
of intellectual services are: information
processes, Research and Development (R&D) and information management. They
all create the new discipline, which is The Knowledge Management;
Redefinition of the term "country" - decreasing
roles of countries as the result of growing roles of integration associations
and international organizations.
Globalization's
components
There are
many factors and determinants which influence on the globalization process.
Some of them appear on the worldwide scale and other are realized in particular
countries. If these factors are more and more advanced in the country, this
country will better conduct the globalization process. The most important
determinants are the following .
A. Global Markets
1.
Financial
markets - thanks to financial markets deregulation and capital flows liberalization, their globalization process
is the most advanced. Private capital is transferred very fast all over the
world. Huge amounts of capital flows, financial transactions and a multitude of
mediators have contributed to the creation of global financial markets.
Nowadays they are working automatically and aside of the real sphere. The
creation of electronic money, as the computer record, became a wonder of the
contemporary world economy. In the new electronic economy, fund managers,
banks, international corporations and many individual investors are able to
transfer capital from one to another remote place in the world. Thanks to
technology development and using the newest computer science solutions, very
complex financial operations can be realized on different markets during 24
hours a day. Global financial markets have also dominated contemporary
production factors allocation processes, recently. Nowadays financial markets
are not stable, there are sudden changes of capital flows directions and
financial crises are spreading very fast all over the world.
2.
Markets
of goods and services - globalization of these markets accelerated thanks to
liberalization, opening of national economies and institutionalization of foreign
trade global rules within the WTO. 90% of foreign trade is based on these
rules. It develops dynamically and the share of trade in GDP increases in many
countries. More and more goods are subject of foreign trade and many market
segments offer products equal to standards and quality on the global market.
The global consumer markets, ranges of products and brand names are becoming
bigger. As the result of MacDonalization, consumers' needs and preferences are
also similar. Only in some areas they are differentiated.
3.
Job
markets and labor migration - progress in this sector is rather not so great.
Job markets are not global, but thanks to computer technology the work can be
done in remote places without the employees' migration. The management staff is
the most mobile in the global economy. The globalization process influences on
local job markets, salaries, unemployment rates and migration. Migration can
also result from tourism. Nowadays it is more and more popular, especially when
flight tickets are cheap and global services and information are more developed.
4.
Markets
of technology, knowledge and information - Transport and telecommunication
technology progress and computer science development are crucial factors which
accelerate the globalization process. Computer revolution and telecommunication
progress (electronic communication, Internet, e-business, cell phones,
computers and programs) enabled the development of global interactions. The
world transport and telecommunication network system helps to transfer ideas,
goods, information and capital the most effectively. The computer technology
progress causes that "the world shrinks" and events, information and
ideas are at once spread all over the world. The global information revolution
made changes in production, finance, foreign trade and in business. Services
branches, with a weak position in foreign trade before, have become stronger
and industrial branches gained the global range. Information revolution also
created opportunities of production organization for companies' branches all
over the world.
B.
Global competition
The globalization process is
connected with global competition, which becomes stronger on the international
markets. If these markets are more connected with each other, companies have to
coordinate their activities in many countries and competition conditions become
more and more difficult. Liberty, liquidation of goods, services and capital
flows' obstacles and possibility of doing business abroad, caused that the
world economy's entities (companies, banks, financial institutions) on the one
hand started to look for bigger profits abroad, but on the other hand they had
to face the global competition. Globalization changes also the rules of game in
gaining profits from competition. It puts the pressure on mergers and
acquisitions in order to possess a long-lasting competitive advantage. Both
companies and national economies have to take actions to fight with global
competition. This competition sets the paths of production restructuring, its
organization and fastens the technology progress.
C.
Global
economic activity. In the last decade, the high dynamism of Foreign Direct
Investment (FDI) contributed to the globalization process of goods, services
and financial markets. It was even higher than the dynamism of world trade.
Thanks to trade and capital flows liberalization and possibility of doing
business abroad, more and more companies transfer their capital and technology
to other countries in order to be more efficient. Globalization creates
favorable conditions for expansion and profits. Foreign Direct Investments
change streams and structure of international trade and influence on
development processes. Companies realize global expansion strategies,
reorganize and change management methods in order to decrease cost, improve
profits, minimize the risk and possess a competitive advantage on the global
market. International
corporations activities reinforce the globalization process, because they are
able to adjust to new conditions the most effectively. They act on different
markets and increase the flows of capital, goods, services and technology.
Corporations join and cooperate with each other. They conduct very complex
investments and make strategic decisions concerning allocation of resources.
Former, this was the role of countries and governments. Nowadays corporations'
position still grows on the global market.
D.
Global industry production Technological changes, progress in
the computer science, the development of telecommunication and the decrease of
transport costs created new possibilities for many industrial branches and
improved the organization of production. The basis of production internationalization
is technology progress, markets liberalization and the increase of production
factors mobility. These industrial changes are the result of creating complex
production connection networks between companies in many countries. Globalization
is connected with companies new activities and their specialization in the
global scale (investments, trade, production, technology development, Research
and Development - R&D, new products and marketing). Companies' global
strategies allow them to settle production in particularly favorable
conditions. Their development results from headquarters' activities in
connection with other cooperating companies in the world. Acting on the global
market is supported by disseminating of market institutions, organizational
structures, management methods, production systems, data processing methods,
communication, and law regulation in the worldwide scale.
E.
Global
relationships and interactions
Nowadays, the high degree of
relationships and connections between economies causes that a phenomenon
existing in one country or region is easily transferred to other countries or
regions. Unfortunately, the most often this concerns crises. The development of
particular countries often depends on the situation on the main stock exchanges
and on the currency markets. In the past, most countries were independent on
sudden changes of other markets. The pace of crises' transfer is very dangerous
especially for emerging markets. Now, remote economic and political events have
a stronger direct influence on other countries than ever before (financial
crises). Additionally, actions and decisions made in one country can have
global implications and influence on economy, politics and lives in other
countries. As the result of trade, production, financial, investment and
technological connections between countries, the world economy is not the sum
of individual markets any more, but has become an integrated market system.
F.
Education
Nowadays, in the era of globalization, the education system correlates with new
global economic requirements. It is the result of problems the society has to
face: increasing changeability and uncertainty and deepening different social
and economic risks. Therefore, there are a few challenges confronting education
systems, which make it necessary to conduct improvements in those systems:
sudden development of technological knowledge; countries' integration and
world economy's globalization; increase of importance of small and medium
enterprises; increase of costs of education.
Therefore, the education system has
to be changed, too. Schools and universities should develop abilities of fast
self-organizing and enterprising adaptability to continuously changing
conditions. Modernity and entrepreneurship have become the most important and
the most difficult challenges of education in the XXI century. The experts
claim the new education system should be a proinvestment. It is to be based on
the development of individual creative abilities and on preparation to taking
part in innovative organizational cultures and institutions, where innovations
are created. Therefore, pupils should be taught innovation from the lowest
education level – the primary school. Virtual organizations play also a crucial
role in the education process. They are the source of innovation and posses the
ability of elastic adjustment to new conditions. Pupils and students should
take part in practice and education exchange programs, because this teaches
them how to act in conditions of other cultures and traditions and how to
cooperate with people from other countries. The education system also has to be
continuously improved, because change is one of the most important features of
the global economy.
G.
Ecology
Global problems are some of the features of the world economy and they are
thought to be a result of the integration process. Nowadays these problems are
a danger for humanity and therefore they have to be solved not locally but globally.
Environment contamination is the most global problem and it is connected with
countries' economic activity. Currently, the contamination level is so high
that it is hard to keep the environment in balance and also possibilities for
human existence decrease. The world production has grown five times since
the II World War. Dynamic
transformations (opening of economies, standardization of preferences and
transport and communication development), being conducted in the last years,
require a huge amount of natural resources and contribute to environment
contamination at the same time. Human activities put pressure on environment
through: overusing natural resources, contamination of natural ecosystems,
pollution of air and water causing diseases, high population growth. In the
globalization process the efforts taken in order to improve the environment are
necessary and laborious. It is impossible to conduct them by one country or
even by a group of countries. They have to be done globally, because nowadays
the environment, like money, possesses a more international character than ever
before.
INTERNATIONAL TRADE IN INTERNATIONAL ECONOMIC
RELATIONS SYSTEM
The
Nature of International Trade
Today international
trade is one of the major driving forces of economic development. It appears as
a sphere of international economic relations and is formed by merchandise trade, trade in services and products of
intellectual labor of all countries in the world. Today, it accounts for
about 80% of all international operations. A single country takes part in
international trade in the form of foreign trade, i.e. it is the trade between
the country and other ones, which consists of two opposing flows of goods and
services: export and import. International
trade is trading between residents of different countries, which may be
individuals and legal persons, firms, TNC, non-profit organizations, etc. It
provides the voluntary exchange of goods, services, products of intellectual
labor between the parties of a trade agreement. Since this exchange is
voluntary, both parties of the agreement must be confident that they will get
benefit from this exchange, otherwise the agreement will not be signed.
International trade is a characteristic feature of the existence of the global
market, which is the realm of commodity-money relations between the two
countries and is based on the international division of labor and other factors
of production. The product, which is located on the world market in the phase
of the exchange, performs the function of information as reported on the mean
values of aggregate demand and supply. Therefore, countries have the
opportunity to evaluate and adapt the parameters of its products and production
(ie what, how much and for whom to produce) to the demands of the global
market.
International trade of
goods was historically the first and until the certain period of time, the main
sphere of international economic relations. Only at the end of the 20th
century, different forms of financial operations became dominant in the
international economic system. But international trade is still very important,
which is proved by the growth of international trade volumes. According to the
WTO experts, international trade volume increased by 7.6% in 2006, 15.2% in 2007, 15.4% in 2008. Such rapid development of
international trade, is mainly connected with strengthening of international
relations liberalization process, increase of demand on manufactured goods,
percentage of which composes 70% in total volume of international export.
However in 2009 international trade volume reduced to 13.1% due to the world
financial crisis. In 2010, the decline in world trade has stopped: the increase
was 13.8%, and in 2011 and 2012 - respectively 5.0% and 3.7%. International
trade today, as before, remains an important growth driver for international
economics.
The
Geographical and Commodity Structures of International Trade
Geographic and
commodity structure is an important feature of international trade and presents
a structure in terms of geographic distribution and commodity filling.
Geographic structure of international trade means the distribution of trade
flows between separate countries and their groups, created according to
territorial or organizational criterion. Territorial geographic structure
generalizes information about international trade scale of countries belonging
to the same part of world or extended country group (developed countries,
developing countries, countries in transition). Organizational geographic structure
generalizes data concerning international trade between both countries belonging
to international trade and political unions and countries, which are separated
in defined groups by the chosen criterion (oil-exporting countries, debtor
countries etc.). Geographic structure of international trade was formed under
the influence of world economic division of labor and scientific and technical
revolution development.
Commodity structure of
international trade is formed under the influence of competitive advantages,
which are available for the national economy. A country has competitive advantages only if prices on export
commodities (or domestic prices) are lower than the world ones. Difference in
prices occurs due to different production costs, which are depended on two factor groups. The
first factor group is formed by natural competitive advantages. Among them
are natural-geographical factors: climate, availability of mineral fossils,
soil fertility etc. The second factor
group (the socio-economic one) is formed by gained competitive advantages.
These factors define scientific-technical and economical level of country
development, its production apparatus, scale and sequence of production,
production and social infrastructure, scale of research activities. All this
defines competitive advantages, which were gained in the development process of
the national economy.
Main
Specific Features of International Trade
International trade, as
a special sphere of international economics, has its own specific features,
which distinguish it from intra-national trade: government regulation of the
international trade; independent national economic policy; social and cultural
difference of countries, financial and commercial risks.
Government
regulation of the international trade. Every country is functioning within
its own legal framework. The government of the country controls and takes an
active part in foreign-trade relations and monetary relations, connected with
trade operations. Such interference and the control differ significantly from
the degree and the nature of those measures, which are applied to domestic
trade. Government of every sovereign country, due to its own trade and fiscal
policy, creates its own system of export and import licensing, import and
export quotas, duties, embargo, export subsidies, its own tax legislation etc. Government
rules on monetary regulations and the delegated legislation, concerning
standards of quality, security, public health, hygiene, patents, trademarks,
packing of goods and information content, which is mentioned on packing, can be
regarded as international trade barriers.
Independent
national economic policy. National economic policy can
permit free flow of goods and services between countries, regulate or prohibit
it, all this influence significantly the international trade. To support the
balance of international payments, a country must harmonize its economy with
world one, i.e. pursue a policy, which would provide the competitiveness of
prices and costs in comparison with other countries and which wouldn’t allow a
discrepancy between domestic law and international regulation, which could lead
to a conflict situation in the sphere of foreign trade.
Social
and cultural differences of countries. Countries which take
part in international trade have different traditions, languages, priorities
and culture. Although such differences do not influence significantly on
international trade, they complicate relations between governments and add a
lot of new elements in activity of international enterprises. Lack of knowledge
of exporting or importing in a country leads to uncertainty and distrust
between sellers and customers.
Financial
and commercial risks. International trade takes place
between countries with different exchange systems, which cause the exchange of
one currency to another one. Due to the exchange-rate instability, there is the
currency risk. Currency risk in international trade means risk of currency loss
as a result of change in currency of price in relation to currency of payment
in between signing an international contract and effecting of payment according
to this contract. During international trade realization, it’s necessary to
spend some time on goods transportation, that’s why an exporter runs the credit
risk and feels discomfort, connected with time and distance, which is needed
for the transportation abroad and payment receiving. The time gap between the
order to a foreign supplier and goods receiving, as a rule, is often connected
with the duration of the period of transportation and the need to prepare the
appropriate documentation for it. The goods preparation and its delivery abroad
requires additional financing, for which an exporter has to apply to a bank. In
this case, the exporter needs a credit for a much longer time than he needed in
case of selling goods domestically. The exporter must carry out his own
commitments in compliance with term and conditions of a credit deal. However, a
risk of a bad debt can appear. Commercial risks, connected with possibilities
of non-receipt of profits or a loss occurrence during trade operations
realization, can appear in such cases:
customer insolvency
at the moment of merchandise payment;
customer’s refusal of
merchandise payment;
change in price on goods
after making of contract;
decline in demand for
goods;
impossibility of
money transfer to the exporter’s country in connection with currency
limitations in a customer’s ( importer’s) country or a lack of currency; or
refusal of an importer’s country government for assignment of this currency
because of any other reasons.
The
Importance of International Trade in the Modern World
The importance of
international trade within the world economic system is caused by important
factors and practicability of international exchange of goods and services.
There are some factors predetermining the necessity of international trade.
They are:
Emergence of the
world market.
Unevenness of
development of individual industries in different countries. Products of the
most developed industries, which can’t be realized at the internal market, is
transported abroad. In other words, both the sales requirements at foreign
markets and the need in receiving certain goods from outside, appear.
Tendency to unlimited
expansion of the production. Since the capacity of domestic market is limited
by solvent demand of population, production is overgrowing the limits of
domestic market and businesspeople of every country are struggling for foreign
markets.
Tendency to get
higher income in connection with the usage of low-paid manpower and raw
materials from developing countries. International trade is especially
important, because there is no country in the world, which can exist without
foreign trade. They are all depended on international trade, but their level of
dependency is different. It’s determined as the ratio of half value volume of
foreign trade turnover (export + import) to GDP. According to this indicator,
all countries can be divided into 3 groups: high dependent (45 – 93%), medium
dependent (14-44%) and low dependent (2,7 – 13%). International trade is
rational, when it provides some benefits, which can be received on three
levels: national level, the level of domestic international firm and also on customers’
one. Due to taking part in the
international trade, countries gain:
the opportunity to
export those goods, production of which takes more national resources, which
country has in relatively large numbers;
the opportunity to
import those goods, which can’t be produced in their country because of the
lack of needed resources;
economies of scale
effect in production, specialized on more narrow set of goods.
There are two points of
view on benefits from international trade for home international firms. The
first point of view concerns the export opportunities, the second one - the
import ones.
From the point of view
of export activity, enterprises obtain benefits at the expense of:
using excess capacity,
which is hold by companies, but are not desirable by domestic demand; getting
greater profits. Because of the difference between the foreign trade
competitiveness environment and the national one, the producer can sell goods
there with higher income;
considerable volumes
foreign sales, which make natural producers less dependent on domestic economic
conditions;
reduction of
production costs, connected with: fixed costs, covered by the expense of bigger
volume of outputs; effectiveness rising due to experience, gained during
manufacture of large batch of produce; bulk purchases of materials and their
transportation by large batches;
distribution of risk.
Producer can reduce the fluctuations of demand by organizing the production
distribution on foreign markets, due to of countries' economic activity being in different phases, and some goods
being on different stages of the life cycle;
knowledge and best
practices, received by firms in the functioning process on foreign markets.
From the point of view of import activity, enterprises obtain benefits at the
expense of:
avoiding limits of
the domestic market by reducing production costs or by upgrading quality of
production;
getting cheap
high-quality materials, components, technologies to be used in its production;
using excess capacity
of trade distribution network;
expansion of
commodity line due to which a firm can increase its supply of product line;
possibilities of
distribution of operative risks, as by expanding the suppliers range, the
company will be less depended on a singular supplier. In their turn, consumers
obtain benefits from cheaper prices, increasing of quantity and diversification
of goods, which leads to higher standard of well-being.
Fundamental
Theories of International Trade Development
Mercantilism:
The Essence, the Significance and Limitations
The modern theories of
international trade have a rich history. For a long time, started from the emergence
of economic science by itself (the beginning of the 17th century) scientists
have tried to answer the following key questions:
Why does
international trade exist and what are its economic basis?
How much profitable
is the trade for each of the participating countries?
What is it necessary
to choose for economic growth: free trade or protectionism?
Mercantilism was the
first one, which proposed the theoretical understanding of these questions. It
is a doctrine, where the existing world was considered in a static and the
wealth of nations was considered as a fixed phenomenon in every moment.
Therefore, its adherents (T. Man, A. Serra, A. Montchrestien) believed
that the welfare of one country is possible by means of redistribution of the
existing wealth, i.e. through the pauperization of another country.
Mercantilists associated the wealth with stocks of precious metals (gold and
silver). In their opinion, the larger number of precious metals a country owns,
the richer it is. Also, from their point of view, having more money in
circulation stimulates the development of national production and the
employment increase. A state, according to mercantilists, should:
stimulate exports and
export more goods than import. This approach will provide the gold inflow;
restrict the
importation of goods, especially luxury goods that will provide export balance of trade;
forbid the production
of the final products in its colonies;
forbid the
exportation of raw materials from the parent states to the colonies and allow
free importation of raw materials, which are not obtained within the
country;
stimulate an export
of mainly cheap raw commodities from the colonies;
forbid any trade of
its colonies with other countries, except the parent state, which can resell
the colonial goods abroad by itself. Thus, the mercantilist policy of major
countries was based on striving for maximum accumulation of money capital and
maximum reduction of import, i.e. a state should sell to the foreign market as
many goods as possible and should purchase as little as possible. Meanwhile,
the country should accumulate gold. Mercantilists also felt the need to perform
the governmental control over all economic activities and so justified the economic
nationalism.
The importance of
mercantilism is in the following statements:
1. For the first time,
there was made an attempt to create a theory of international trade, which
directly linked trade relations with the domestic economic development of a
country and with its economic growth.
2. Mercantilists worked
out one of possible models for the development of international trade on the
basis of commodity character of production. They laid the foundations of
categorical apparatus used in modern theories of international trade.
3. There were laid the
foundations of what in the modern economy is called the balance of payments.
However, mercantilists could not understand that the enrichment of one country
could be carried out not only by means of pauperization of other ones it trades
with, that the economic growth is possible not only as a result of
redistribution of existing wealth, but also by means of its accumulation. In
other words, they believed that a country could have benefit from trade only at
the expense of another country that makes trade a zero-sum game.
Nowadays, neomercantilism
appears to be when the countries with high rates of unemployment try to limit
import in order to stimulate domestic production and employment. Mercantilism
school dominated in economy during 15th century. By the beginning of the 18th
century international trade had a huge number of possible restrictions. The
rules of trade were contrary to the needs of production, and there was a need
for a transition to free trade. The
theory of international trade found its next development in the writings of
economists of the classical school.
The
Absolute Advantages Theory: the Essence, Positive and Negative Features
Development of
international trade during the transition period of the developed countries to
a large machine production led to the emergence of the absolute advantage
theory, developed by A. Smith. In his work “An Inquiry into the Nature and
Causes of the Wealth of Nations” (1776), he criticized mercantilism. A. Smith
hold the view that the wealth of nations depends not so much on the accumulated
stock of precious metals, but on the possibility of economy to produce final
goods and services. Therefore, the main task of the country is not the
accumulation of gold and silver, but making arrangements to develop production
on the basis of cooperation and division of labor. A. Smith was the first one,
who answered the question “Why is a country interested in international
exchange?” He believed that when two countries are trade partners, they need to
benefit from trade. When one of them does not win anything, it will abandon the
trade. A state can benefit not only from selling, but also from purchasing
goods at the foreign market. And A. Smith made an attempt to determine what
products are profitable to export and import, and how benefits from trade appear.
The theory of
international trade by A. Smith is based on the following preconditions:
labor is the only
factor of production. It only affects the productivity and price of goods;
full employment, i.e.
all available labor forces are used in the production of goods;
international trade
involves only two countries, which trade only by two products between each
other;
production costs are
constant, and its reduction increases the demand of goods;
the price of one
product is expressed in amount of labor spent on production of another
product; transport costs of goods
from one country to another are not taken into account;
foreign trade is
carried out without any restrictions;
international trade
is balanced (import is paid by export);
factors of production
are not moved between countries.
This theory became
known as the absolute advantage theory, because it was based on the absolute
advantage: a country exports the goods, which costs of production are lower
than in a partner country, and imports the goods, produced abroad with lower
costs. Both countries benefit from the specialization of each of them in the
production of the goods they have absolute advantage in. This gives an
opportunity to use the resources most effectively, resulting in the increasing
of production of both goods. Increase of production of both goods represents
the gain from specialization in production, which is divided between two
countries in the process of international trade. The main conclusion of the
theory of absolute advantage is that every country benefits from international
trade and it is decisive for forming the external sector of economy.
International trade is not a zero-sum game, but a game with a positive result,
i.e. division of labor is beneficial at both the national and international
levels. However, nowadays, by using the principle of absolute advantage, only a
small portion of international trade can be explained (for example, some part
of trade between the developed countries and developing ones). The overwhelming
part of international trade, especially between the developed countries, is not
explained by this theory, because it does not consider the situation when one
of the trading countries has no absolute advantage in any commodity. This
position was explained by D. Ricardo in the comparative advantage theory.
The Comparative Advantage Theory: the Essence,
the Importance and Disadvantages
A rule of international
specialization, depending on absolute advantage, excluded countries without
absolute advantage from international trade. The D.Ricardo’s work
“On the Principles of Political Economy and Taxation” (1817) developed
the absolute advantage theory and proved that the existence of absolute
advantage in the national production of any commodity is not a necessary precondition for the development of
international trade: the international exchange is possible and desirable in
the presence of comparative advantages.
D. Ricardo's theory of international trade is based on the following
preconditions: free trade; fixed
costs of production; absence of
international labor mobility;
absence of
transportation costs;
lack of technical
progress, i.e. the technological level of each country remains unchanged;
full employment;
there is one factor
of production (labor).
Comparative advantage
theory states that if countries specialize in the production of the commodities
that have relatively lower costs in comparison with other countries, a trade
will be mutually beneficial for both countries, regardless of whether the
production in one of them is more effective than in the other one. In other
words, the basis for emergence and development of international trade can be
exclusively a difference in relative costs of production of the commodities,
regardless of the absolute amount of these costs. In the D. Ricardo’s model,
domestic prices are determined only by cost, i.e. by supply conditions. But the
world prices may also be determined by the world demand, which was proved by
the English economist John Stuart Mill. In his work “Principles of Political
Economy”, he showed at what price the exchange of goods between countries is
carried out. In free trade, exchange of goods is carried out in such a
proportion of prices that is set somewhere between the existing relative prices
of goods within each of the trading countries. The final level of prices, i.e.
the world prices, of mutual trade will depend on the level of world demand and
supply for each of these products. According to J.S. Mill’s theory (the
reciprocal demand theory), the price of imported goods is determined by the
price of the goods, which should be exported, to pay for imports. Therefore,
the final proportion of prices in trade is determined by domestic demand for
goods in each trading country. Thus, this theory is the basis of determining
the price of goods, taking into account the comparative advantage.
But its drawback is
that it can be applied only to the countries of approximately the same size,
when domestic demand in one of them can affect the price level in the other one. In the specialization of countries in trade
of goods, in production of which they have comparative advantage, countries can
benefit from the trade (the economic effect). A country benefits from the
trade, as instead of its goods it can get more needful foreign goods from
abroad than on the domestic market. Benefits from the trade are both the saving
of labor costs and the growth of consumption.
The importance of the
comparative advantage theory is the following:
the balance of
aggregate demand and aggregate supply was first described. The cost of goods is
determined by the ratio of aggregate demand and supply for them, both
domestically and from abroad;
the theory is true
regarding any quantity of goods and any number of countries, as well as for the
analysis of trade between different entities. In this case, country
specialization in some goods depends on the ratio of wage levels in each
country;
the theory based the
existence of benefits from trade for all countries, taking part in it;
there become possible
to develop foreign economic policy on the scientific foundation. The limitation
of the comparative advantage theory is in that presuppositions, on which it is
based. It does not take into account the impact of foreign trade on income
distribution within a country, fluctuations in prices and wages, international
capital movements. Also, it does not explain the trade between almost identical
countries, none of which has no a relative advantage over another, it takes
into account only one factor of production – the labor.
The
Factor Proportions Theory: the Significance and its Testing by W. Leontief
The research of
factors, influencing product range and volume of international trade, allowed
the Swedish scientists E. Heckscher and B. Ohlin in 30’s of XX century to
clarify and supplement the key points of the comparative advantage theory and
to formulate the concept of factors of production. Need to seek a new concept
of international trade dictated by the fact that the ideas of David Ricardo
based on the assumption of a constant cost of production in each country.
However, in practice, along with the growth of production and product
diversification was an increase of marginal costs, leading Swedish economists
to the conclusion of necessity to introduce the growth conditions for
replacement cost (relative costs) into the model. The theory is based on the
following preconditions:
there are two
countries; two commodities, one of which is labor intensive and another one is
capital- intensive; and two factors of production: labor and capital;
technologies in both
countries are the same;
each country in
varying degrees endowed with factors of production;
there is no
international movement of factors of production;
there cannot be the
full specialization of countries in production of any product. The most
important assumption of this theory is a different factor intensity of
individual commodities (one commodity is labor-intensive, the other one is
capital-intensive) and different factor abundant of individual countries (one
country has relatively more capital, the other one has relatively less
capital). Factor intensity is an indicator that determines the relative costs
of production factors on the product development. For example, product B is
relatively more capital-intensive than the product A, if the ratio of capital
to labor in the production of goods is more than the ratio of the same cost of
production of the product A. Factor abundance of the country is an indicator that
determines the relative factor endowment of the country. For example, if you
define factor abundance through the absolute size of the factors of production,
the country where the ratio of total capital to total labor is greater than in
other countries will be considered as capital abundant or capital endowment
country.
The essence of the
Heckscher-Ohlin theorem is as follows: each country will export that factor
abundant goods, for the production of which it uses relatively abundant and
cheap factors of production, and will import the goods, which require
relatively scarce and expensive resources. The Heckscher-Ohlin theorem considers trade to
be based on comparative advantages and shows that the reason of the differences
between the relative prices of goods and the emergence of comparative advantage
between countries is the difference in factors endowment. The Heckscher-Ohlin theorem had further
development in the factor-price equalization theorem (the
Heckscher-Ohlin-Samuelson theorem). It answers the following question: "If
the relative price of labor-intensive goods changes, how will the relative
price of the labor change in a labor abundant country, which produces these
goods, as well as, if the relative price of capital abundant goods changes, how
will the price of capital change in a capital abundant country?" The
essence of the factor-price equalization theorem is as follows: international
trade leads to the equalization of absolute and relative prices for the goods,
and this, in its turn, leads to the equalization of relative and absolute
prices for homogeneous factors of production, whereby there produced these
goods in partner-countries.
The theorem has some
limitations: it considers the world in static, determining the factors
affecting the macroeconomic equilibrium at a certain time, and does not take
into account the fact that the absolute amounts of factors of production are
different in different countries, and therefore the absolute amounts of income
for capital will be greater in the country, which is endowed with more capital.
It follows that full equalization of the prices of factors of production as a
result of trade is impossible. However, despite the shortcomings, the factor
proportions theory is an important instrument for the analysis of international
economy, showing the principle of general equilibrium, which is subject to economic
development. This model of international trade proved to be the most suitable
for explaining the processes of trade between the parent states and colonies,
when the first ones performed as the industrialized countries, and the second
ones as agrarian and rawmaterial-producing appendage. Nevertheless, in the
analysis of trade flows in the “triangle” of the United States – Western Europe
– Japan, the Heckscher-Ohlin theorem faces difficulties and contradictions,
which attracted the attention of many economists, in particular, the American
Nobel Laureate Wassily Leontief. He applied the Heckscher-Ohlin theorem to the
analysis of foreign trade of the United States, and by means of several
empirical tests he showed that the terms of the theory do not keep in practice.
Since the United States was a capital abundant country with relatively high
wages, according to the theory, it should export capital-intensive goods, and
import labor-intensive ones. However, in reality, they exported more labor intensive
goods, and capital intensity of American imports exceeded exports by 30%. This
meant that the United States was not capital abundant, but labor abundant. The
results of the Leontief’s research were named “Leontief's paradox”: the
Heckscher-Ohlin theorem is not confirmed in practice, as labor abundant
countries export capital-intensive products, and capital abundant countries
export labor-intensive products. W. Leontief explains this paradox by division
of labor into skilled and unskilled. The United States exported the goods,
whose production in other countries was impossible or inefficient due to the
lower labor skill. W. Leontief created the model of “labor skill”, according to
which, instead of the three factors (capital, land, labor) the production
includes four factors: skilled labor, unskilled labor, capital and land. The
relative welfare of professional staff and skilled labor predetermine the
export of goods, the production of which requires the use of skilled work; and
surplus of unskilled labor contributes to the export of goods, the production
of which does not need the high qualification. Nobody can give a convincing
answer to the question about the reason of Leontief's paradox. The main
explanations are the following: 1947 year, analyzed by Leontief, was not
representative; a two-factor model (capital and labor) was used; American
tariffs, to a considerable extent, protected domestic labor-intensive
industries; human capital was not taken into account. The testing of the
HeckscherOhlin theorem, by means of the data of a large number of countries,
confirmed the existence of Leontief's paradox in other countries.
The
Alternative International Trade Theories: the Reasons of Occurrence and the
Significance
Modern theories of
international trade are generally considered:
on the one hand, as
alternative ones to the Heckscher-Ohlin theorem, because they examine the
circumstances which are not covered by the factor proportions theory. These
theories characterize international trade mainly on the basis of goods
supply;
on the other hand, as
alternative ones to the classical theories, which are considered to be
obsolete. These theories analyze international trade mainly on the basis of
demand from the point of view of consumer preferences.
The main alternative
theories usually include: the product life-cycle theory; the country similarity
theory, the theory of economies of scale.
The basic positions of
the product life-cycle theory were developed by Raymond Vernon in 1966. It is
based on the concept of the product life-cycle, proposed since the early 1960s
by specialists of Harvard Business School, who declared that sales of the
products and their profits from them change over time. A
product consistently passes four stages of life cycle:
1. The stage of
appearance of a new product on the market shows the low sales. The costs of
implementation of this product make the profits low too.
2. The stage of growth
is characterized by growth of profits and sales growth.
3. In the stage of
maturity, the development of competition and market saturation stabilize the
sales and profits.
4. In the stage of
decay, the products become obsolete, the sales and profits fall off.
R. Vernon proves that
in building up of trade relations between countries an important role is played
by technologies and researches, that the industrialized countries have much
more technological and scientific possibilities to develop a new product. In
countries such as the United States, companies may have comparative advantages
in science and technology, which will lead them to a competitive advantage in
the new products development. To stretch the stage of growth of their product
life-cycle, these firms most probably will export the goods developed by
themselves. On the other hand, American import will have a tendency of
advantage of the goods, the production of which does not much depend on
technology or scientific research. The product cycle-theory characterizes the
dynamic aspect of comparative advantages, assuming that during its life cycle a
product consistently changes its suppliers in the world market. The country similarity theory was developed
by a Swedish economist Stefan Linder in 1961, where he takes as a basis the
volume of exchange of similar goods between countries with a comparable level
of development, without regard to the Heckscher-Ohlin theorem. A new approach
was founded on the following principles:
the conditions of
production depend on the conditions of demand. Efficiency of production is as
high as demand;
the conditions of
domestic production depend mainly on the domestic demand. It is the domestic
representative demand that is the basis of production and is necessary, but not
a sufficient condition to export the goods;
the foreign market is
just a continuation of the internal one, and the international exchange is only
the continuation of the interregional one. There is a conclusion, that
international trade in manufactured goods will be more intensive between the
countries with the similar income levels, in comparison with product turnover
between the countries with different income levels, while the exchange is
carried out by identical or similar goods. The convergence of countries
according to the level of development requires to align the quality of goods.
However, the Linder's theory does not specify what manufactured goods a country
will export and which of them it will import. The theory of economies of scale
is not related to the theories of comparative advantage or to the ratio of
production factors. It recognizes the different levels of market’s
monopolization and non-optimal using of factors of production. As the factors
of production growth, the cost-per-unit
reduces as a result of: increased specialization of production, the
relatively slow growth in auxiliary departments than in the scale of the
production, technological economy. Economies of scale is the production
development, at which the growth of unit production factors costs leads to
increased production of more than one unit. The theory of economies of scale
explains trade between countries that are so close in factor endowments that
even minor discrepancies in its endowment cannot explain the mutual trade, and
also explains the trade between the countries by close to or technologically homogeneous
products. According to this theory, in countries with a large domestic market,
production must be placed to ensure the growth of the economic of scale effect
of production. Fundamental to this concept is the assumption that the developed
countries are endowed with factors of production in almost equal proportions,
and therefore trade between them is suitable in the event that they specialize
in the manufacture of goods of different industries due to what costs are
reduced as a result of mass production. Because of the international trade, the
number of firms and a variety of manufactured goods manufactured by them
increase, and the price of goods reduces. This was reflected in the works of
the American economist Paul Krugman.
International
trade policy
The Main Types of Trade Policy
Regulation of
international trade supposes purposeful influence of the state on trade
relations with other countries. The main goals of foreign trade policy are:
the volume change of
exports and imports;
changes in the
structure of foreign trade;
providing the country
with the necessary resources;
the change in the
ratio of export and import prices. There are three main approaches to the
regulation of international trade:
a system of
unilateral measures, in which the instruments of state control used by the
government unilaterally and not coordinated with the trading partner;
the undertaking of
bilateral agreements, in which trade policy measures agreed between trading
partners;
the undertaking of
multilateral agreements. Trade policy is coordinated and regulated by the
participating countries (the General Agreement on Tariffs and Trade, which is
included in the system of the WTO agreements, agreements on trade of EU member states).
The state can use each of approaches in any combination. The basic line of
government control of international trade is the application of two different
types of foreign trade policy in combination: liberalization (free trade
policy) and protectionism. Under the free
trade policy is understood the minimum of state interference in foreign trade,
which developed on the basis of free market forces of supply and demand, and
under the protectionism - the state policy, which provides the protecting of
the domestic market from foreign competition through the use of tariff and
non-tariff trade policy instruments. These two types of trade policy
characterize the measure of state intervention into international trade. If
under the conditions of liberalization policy, a basic regulator of foreign
trade is a market, then the protectionism practically excludes the operation of
free market forces. It is assumed that economic potential and competitiveness
at the world market of separate countries is different. Therefore a free action
of market forces can be unprofitable for the less developed countries.
Unlimited competition from more powerful states can result to economic
stagnation and the formation of inefficient economic structure in
less-developed countries The protectionism policy contributes to the
development of certain industries in the country and often is a necessary
condition for industrialization of agrarian countries and unemployment
reduction. However, the removal of foreign competition reduces the interest of
domestic producers in the implementation of scientific and technological
progress, improving the efficiency of production. There are such forms of
protectionism:
selective
protectionism, directed against some countries or some commodities;
industrial protectionism,
which protects certain industries;
collective
protectionism: countries, which belong to economic integration organizations
conduct this form to countries, which do not belong to a union;
hidden protectionism,
which is carried out by methods of domestic economic policy. Every country has
economic, social and political arguments, protecting interests of
protectionism. The main arguments for
restrictions on foreign trade are:
necessity of defense
providing;
increase of domestic
employment;
diversification for
the sake of stability;
protection of infant
industries; protection from dumping;
cheap foreign labor
force. So, the art of trading policy is to find the point of balance between
two trends: free trade and protectionism. Each policy has its own advantages
and disadvantages, depending on the circumstances, time and place of its
applying. The instruments of state regulation of international trade include
the following:
tariff methods that
regulate mostly the imports and protect domestic producers from foreign
competition. They make foreign goods less competitive;
nontariff methods,
regulating both imports and exports (they help to bring more domestic products
on the world market, making them more competitive). To indicate the nature of
trade policy, the following two indicators are used:
the average level of
customs tariff. It is calculated as the average rate of import duties,
according to the value of imported goods, to which the rate is applied. This
indicator is defined only for the goods whose imports are imposed by duties;
the average level of
nontariff barriers. It is calculated as the value share of the imports or
exports, which are subject to the restrictions. Mode of implemented
restrictions for each of the indicators is considered as open one if its level
is less than 10%, the moderate one if less than 10-15%, the limited one if over
25% and the restrictive one if 40-100%.
Tariff Methods for International Trade
Regulation
Customs tariff is the
main and oldest instrument of foreign trade policy. This is a systematic set of
rates of customs duties, imposed on goods and other things, imported to the
customs territory of a country or exported from this territory. A duty, charged
by customs, is a tax on goods and other things that are moved across the
customs border of the state.
Duties perform the
following functions:
a fiscal function,
when they are used to generate, mobilize, accumulate financial resources of the
state. This function applies to both import and export duties;
a protectionist
function, when they are introduced to reduce or eliminate the imports, thereby
protecting domestic producers from foreign competition;
a balance function,
when they are introduced to prevent from undesired exports of the goods, the
domestic prices of which are lower than the world ones. There are the following
types of duties: 1. According to the way of levying: ad valorem (value)
duties (ТAV) imposed as a percentage to the customs value of the goods which are
subject to duty (for example, 30% of customs value); specific duties (ТS)
imposed in the prescribed amount of money per unit of goods which are subject
to duty (for example, $15 per 1 ton); compound duties that combine the two
above-mentioned types of customs duties (for example, 30% of customs value, but
no more than $15 per 1 ton).
2. According to the
object of levying: import duties imposed on the goods imported to the customs
territory of a country; export duties imposed on the goods exported from the
customs territory of a country.
3. According to the
nature: seasonal (import and export) duties, imposed on the goods of the
seasonal nature for operational regulation of international trade. It is valid
during a few months; special duties applied by the state in the following
cases: a) as protective duties, if goods are imported to the customs territory
of a country in such quantities or under such conditions that cause or threaten
to cause injury to domestic producers of the similar or competing products; b)
as a precautionary measure against the participants of foreign economic
activity, which disserve the interests of the state in a particular industry,
as well as a measure to stop the unfair competition; c) as a measure in response to discriminatory
and (or) the unfriendly actions of foreign countries, as well as in response to
the actions of different countries that restrict the legitimate rights of
entities of foreign economic activities of a country; anti-dumping duties
applied to the imports to the customs territory at the price significantly
lower than in the country of exports at the time of the exports, if such
imports cause or threaten to cause injury to domestic producers of similar or
competing products, or impede organization or expansion of production of such
goods; compensation duties applied to the imports of the goods on the customs
territory, in the production or exports of which the subsidies are used
directly or indirectly, if such exports cause or threaten to cause injury to
domestic producers of similar or competing products, or impede organization or
expansion of production of such goods.
4. According to the
origin: autonomous duties imposed on the basis of unilateral decisions of
public authorities; agreement duties imposed on the basis of bilateral or
multilateral agreements; preferential duties with rates lower than the
current tariff.
5. According to the types
of rates: permanent rates are rates of customs tariffs, imposed by public
authorities, which may not change depending on the circumstances; variable
rates are rates of customs tariffs, which may vary by state authorities in
certain cases.
6. According to the
calculation method: nominal rates are customs rates, indicated in the customs
tariff; effective (actual) rates are a real level of customs rates for the
final goods, calculated on the basis of the level of duties, imposed on
imported units and components of the products.
Non-tariff Barriers for International Trade
Regulation
For international trade
regulations also applied the other trade restriction, - non-tariff ones, which
is widely used in the trade practices.
Distribution of non-tariff barriers stems from the fact that their
introduction is the privilege of the state government, and they are not
regulated by international agreements. Governments are free to apply any kind
of non-tariff barriers, which is not possible with the tariffs, regulated by
the WTO. In addition, non-tariff barriers usually do not result in immediate
increase of the price of the goods and, therefore, a consumer does not feel
their impact in the form of a supplementary tax (introducing a tariff makes the
product price increases by the amount of the duty). In some cases, the use of
non-tariff methods, with a relatively liberal customs treatment, can lead to a
more restrictive nature of state trade policy as a whole. Non-tariff barriers
can be divided into the following groups: quantitative, hidden and financial
ones.
Quantitative
restrictions include quotas, licensing, “voluntary” export restraints. Setting
quotas. A quota is the most common form of non-tariff barriers.
A quota is a quantitative measure of the export or import restricting of the
goods by a certain number or amount for a certain period of time. Quotas are
usually used to regulate the imports of agricultural products. If the objective
of the government is to control the movement of some product rather than its
restriction, then a quota can be imposed at a higher level than the possible
imports or exports. By the direction, quotas are divided into the following:
export quotas, imposed by the state government to prevent from the export of
scarce products in the domestic market, as well as to achieve political
objectives. These quotas are rare; import quotas, imposed by the state
government to protect the domestic market from the foreign competition, to
achieve balance in the trade balance, to regulate supply and demand within the
country, as the adequate measure in response to discriminatory trade policies
of other countries. By scope, quotas are divided into the following: global
quotas, imposed on imports or exports of a certain product for a certain period
of time, and do not depend on the country importing or exporting this product
(for example, the USA use quotas to regulate the importation of Roquefort
cheese, certain sorts of chocolate, cotton, coffee, etc.). The aim of
introduction of these quotas is to achieve the required level of domestic
consumption. The amount of global quotas is defined as the difference between
domestic production and consumption of the goods, which they are imposed on;
The
hidden trade restrictions
In international trade
practices, depending on the motives and time of application, there are
sporadic, persistent and predatory dumping. Sporadic dumping is a casual sale of surplus goods in the world
market at a lower price than in the domestic market. This form of dumping is
used in case of overproduction of goods, when a firm is unable to sell the
goods in home country and does not want to stop its production. Persistent dumping is a long-term sale
in the world market at a lower price than in the domestic market. Predatory dumping is a temporary
intentional reduction of export prices in order to drive out competitors from
the market and introduce subsequently monopolistic prices. Despite the fact
that dumping brings some benefit to a country-importer, improving its terms of
trade, governments consider all types of dumping of foreign producers a form of
unfair competition. Therefore, it is prohibited both by the international WTO
rules and national legislation in several countries.
Subsidies.
Governments of many countries in order to develop certain industries and
provide the necessary export policy, use subsidies, i.e. carry out state
subsidies to producers when they enter the world market. In other words, a
subsidy is a financial or other support by public authorities of the
production, processing, selling, transporting, exporting of the goods, in the
result of which the entity of economic-legal relations of an exported country
receives benefits (profit). This support of national producers, at the same
time, discriminates against importers. Depending on the nature of payments,
there are direct and indirect subsidies. Direct subsidies are direct payments
to an exporter after the export operation, which are equal to the difference
between the expenditures and the received profit. Direct subsidies contradict
international agreements and are prohibited by the WTO. Indirect subsidies are
hidden subsidies of exporters in the form of tax exemptions, preferential terms
of insurance, repayment of import duties, etc.
According to
specificity, a subsidy can be as follows:
a legitimate subsidy,
which does not give reasons to apply compensatory measures;
an illegitimate
subsidy, which gives reasons to apply compensatory measures. Depending on the
entity, receiving a subsidy, there are domestic and external (export)
subsidies. Domestic subsidies are government financing of domestic production
of goods, competing with imports. They are considered as one of the most
disguised financial instruments of trade policy, as well as the best method of
import restrictions in comparison with import tariff and quota, because they do
not distort domestic prices and provide smaller losses for the country (losses
for the national economy occur because : a) as a result of receiving subsidies,
inefficient local producers can sell their goods; b) subsidies are financed
through the budget, i.e. by means of taxes). Export subsidies are government
financing of national exporters, allowed to sell the goods to foreign buyers at
lower prices than in the domestic market, and thereby promote the exports.
Export subsidies may be granted in the following main forms: providing an enterprise with direct
subsidies; payment of premiums after
export operations; introducing
preferential (rates, base of calculation, mechanism of charging, etc.)
transport or freight tariffs for export shipments compared to transfers in the
national market; direct or indirect delivery of imported or national goods by
a public authority to use the export goods in the production under more
favorable conditions than the conditions of supply of competing goods to
produce the goods, intended for consumption in the domestic market, if these
conditions are more beneficial for their exporters than in world markets;
exemption or deferral of payment of direct taxes, which must be paid by
exporters, implementing export transaction or paying to social insurance funds;
giving reductions when paying taxes; in the case of production and delivery
of goods for exports, introducing exemptions of payment or repayment of
indirect taxes; reduction of rates or
repayment of taxes on imports of material and technical resources, the goods
for export; implementation of state
programs, which guarantee or insure export credits, guarantees or insurance
programs of non-arising of the cost of the exported goods or exchange risk
programs, using premium rates, insufficient to cover the long-term costs and
losses, arising from the implementation of these programs. An export subsidy
reduces an export price of the product and demand for the product increases
abroad. As a result, the terms of trade of the country, that exports,
deteriorate. However, due to the decrease in the export price, the quantity of the exported goods increases.
Because of the growth of exports, less products appear in the domestic market,
a domestic price increases. The benefit or loss of the exporting country
depends on the fact, whether it can compensate the losses, linking with the
worsening terms of trade, i.e. decline in export prices, by means of increase
in sales. An export subsidy is an expenditure line of the budget, and hence an
additional tax burden for the taxpayers (the costs of financing the subsidy are
equal to the quantity of goods, exported after the introduction of the subsidy,
multiplied by the amount of the subsidy).
Thus, as the subsidies reduce the costs of producers, they have an
impact on international trade by means of artificial improving of
competitiveness of certain firms in export markets, or providing the advantages
of internal products compared with imported ones.
The importing country
when an export subsidy occurs (the use of illegitimate subsidies) may impose
countervailing duties levied on goods that are subject to countervailing
measures. These measures can be used in the event of serious damage to the
interests of other countries, in particular in the following cases: total
amount of subsidy in comparison to the cost of the product is greater than 5%;
subsidies cover the cost of production of industries; subsidies are not
one-shot and cover the production costs of the enterprise; direct debit by
the government. Export credits. To hide the export subsidies, governments use
export credits, providing financial incentives to develop exports by domestic
producers. Export credits can be the
following: subsidized credits for domestic exporters. These credits are issued
by state banks at the lower interest rate than the market one; state credits
for foreign importers, who must purchase the goods only from firms of the
country, providing this credit.
INTERNATIONAL
FACTOR MOVEMENTS IN INTERNATIONAL ECONOMIC RELATIONS SYSTEM
The Main Points and Forms of International
Capital Movements
International capital
movement is a rather developed component of the international flows of factors
of production. Its nature consists in the partial removal of the national
capital, after which it is included to the manufacturing process or other turnover
in other countries. Under modern conditions, the capital mobility is relatively
high, although it has more restrictions than the international trade. The
growth rates of capital movements between countries are several times greater
than the growth rates of both production and international trade. International
capital movements can replace or complement the international trade, if the
efficiency of use of capital is higher than the result of international trade.
International capital migration is not a physical movement of production means,
but a financial transaction: loans, purchase and sale of securities, the
investment.
Specific forms of
international capital movements are distinguished by the following features:
sources of capital
origin;
the nature of use of
capital;
terms of capital
investment;
the purpose of
capital investment.
By the sources of
origin, capital is divided into official
capital and private capital. Official
capital is funds of the state budget or the budget of international
organizations (IMF, the World Bank, etc.), which move abroad or from abroad
according to the decisions of governments or intergovernmental organizations.
Its source is money of taxpayers. Private
capital is funds of private firms, banks and other non-state organizations,
which are provided in the form of investment, commercial loans, interbank
crediting. By the nature of use, capital
is divided into business capital and
loan capital. Business capital is funds that are directly or indirectly
invested in the production for profit earning. It is usually private capital.
Loan capital is funds that are provided to a borrower to obtain a given
percentage. On an international scale, loan capital is basically official
capital.
By terms of investment,
capital is divided into short-term, medium-term and long-term capital.
Short-term capital is capital investment for less than one year, mainly in the
form of the trade credit. Medium-term and long-term capital is capital
investment for more than one year. All investments of business capital are
mainly in the form of direct investments, as well as in the form of state
credits. By the purpose of investment, capital is divided into direct and
portfolio investment. Direct investment is capital investment in order to
acquire control over the object of
allocation of capital. It is mainly export of private business capital.
Portfolio investment is capital investment in foreign securities without the
right of control over the investment object. It is mostly export of private
business capital as well. From a practical standpoint, the most important fact
is the functional division of capital into direct and portfolio investment. The
major role in international capital movements is played by international loans
and bank deposits. The forms of
international capital movements are defined in the investment and banking laws
of each country.
Foreign
Direct Investment Foreign direct investment (FDI) has
a special place among the forms of international capital movements. This is due
to the following two main reasons: foreign direct investment is a real
investment, which, unlike portfolio investment, is not purely financial assets
denominated in the national currency. It is invested in business, land and
other capital goods; foreign direct investment, unlike portfolio investment,
usually provides a managerial control over the object of the invested capital.
Prior to the emergence of transnational corporations (TNCs) all private foreign
investments were mainly “portfolio” ones. With the appearance of TNCs (i.e.
enterprises that own or control the production of goods and services outside of
the country in which they are based), part of international capital movements
take the form of foreign direct investment. Foreign direct investment is a kind
of foreign investment, intended to invest in production and to provide the
control over the activities of enterprises by means of acquisition of a
controlling interest. The proportion that determines the ownership varies in different
countries. In the USA, formally a direct foreign investment is any capital
investment if an investor holds a 10%
interest in the The place of foreign direct investment within international
capital movements company. Foreign direct investment covers all types of
investment, either buying new shares, or simple crediting, if only an investing
firm holds more than 10% interest in a foreign company. The proportion of
participation in the company’s capital can be obtained in exchange for
technology, skilled stuff, markets, etc. Investor’s property (complete or
partial) and his control over the foreign enterprise, which becomes part of the
organizational structure of TNCs as its branch or subsidiary company, are the
main differences of foreign direct investment from other types of investing.
The hallmark of foreign direct investment can be considered a prevailing of the
sales of the product, produced abroad with the help of FDI, over the sales of
domestic products in the form of trade exports. The factors that affect the
growth of foreign direct investment and make proactive growth of FDI compared
to the growth of the world trade (as well as GDP of the industrialized
countries) are as follows: integration of production, its evolution towards a
so-called international production; a growing role of TNCs; economic policies
of the industrialized countries to support economic growth and employment; the
trend of the developing countries and countries with economies in transition to
overcome the crisis of the economy and social sphere; environmental factors
that encourage the developed countries to transfer harmful production into the
developing countries. When the government participates in foreign direct
investment, their additional motive may be the achievement of certain political
objectives: providing strategic resources, expanding its sphere of influence.
Foreign direct investment is the basis of TNCs domination in the world market.
They allow the transnational corporations to use enterprises in foreign
countries for producing and marketing of products and disseminating rapidly new
products and new technologies at the international level and, thus, enhance
their competitiveness.
As far as they are
concerned, FDI are motivated ultimately by profits. The structure of the main
factors of foreign direct investment can be presented as follows.
Marketing
factors: 1) market size, 2) market growth, 3) a tend to
hold a market segment, 4) a tend to succeed in export of parent company, 5) the
need to maintain close contact with customers, 6) dissatisfaction with the
existing state of market, 7) export base, 8) following the buyers, 9) following
the competition.
Trade
restrictions: 1) trade barriers, 2) preference of
domestic goods by the local consumers. Cost factors: 1) a desire to be closer
to the sources of supply, 2) availability of labor resources, 3) availability
of raw materials, 4) availability of capital and technology, 5) low-cost labor,
6) low cost of other production costs, 7) low transport costs, 8) financial and
other incentives offered by the government, 9) more favorable price levels.
Investment
climate: 1) the overall attitude to foreign investment, 2)
political stability, 3) restrictions in the ownership, 4) exchange rates
adjustment, 5) stability of foreign currency, 6) the structure of taxes, 7)
good knowledge of the country. General
factors: 1) expectation of high profits, 2) other factors. The mentioned above
factors of FDI are specified during the development of investment policy
through the system of indicators, comprising about 340 indexes and more than
100 evaluations of experts in economic, legal, technical, social and other
spheres.
The data analysis form
10 fundamental factors to assess the potential of the country to act as host
FDI or so-called competitive potential of the country.
These factors include
the following: dynamics of the economy (economic potential); production capacity of industry; dynamics of the market; financial support of the government; human capital; prestige of the state; availability of raw materials; the orientation to external markets (export
potential); innovation potential; social stability. Each of these 10 factors
includes a system of specific indicators. For example, for human capital's evaluation,
Swiss experts suggested using 36 indicators that include: population and its
dynamics; the overall unemployment rate; migration of the labor force as a
whole, including highly skilled one; the level of professional training;
motivation of hired workers and their mobility; management and its professional
adaptation; the level of wages; public expenditures for education per capita;
the level of workforce with higher education; periodicals publishing; the
health care system, etc. In practice, most decisions concerning foreign direct
investment are based on many motives and take into account many factors.
Political motives for investing are rarely separated from economic ones. On the
basis of expert estimates, the most attractive conditions for FDI are possessed
by the following countries: the USA, Canada, Germany, Switzerland, and
Asia-Pacific newly industrialized countries (NICs).
Forms
of foreign direct investments
Foreign direct
investment is carried out in the form of transfer of capital from one country
to another by means of crediting or buying the shares from a foreign company,
which is largely owned by the investor or under his control, or by means of
setting up a new business. Therefore, foreign direct investment tends to imply
a high level of investor commitments to the controlled firm in relation to
transferring of new technologies, managerial know-how, the provision of the skilled stuff. Immaterial,
mobile assets become a rather widespread form of FDI under modern
conditions. They may occur even with
small initial funding or without any movement of financial capital abroad. The
mentioned form of foreign direct investment provides the controlled branch
with: the transfer of the management skills; trade secrets; technologies; the
right to use the trade mark of the parent company; etc. Therefore, a particular
attention should be paid to the technology transfer. Technology transfer does
not mean only the emergence of new equipment in the market, but also mastery of
technique of operations' performing on it. In the industries, where the role of
intellectual property is essential, such as pharmacy, education, medicine,
scientific researches, the access to the resources and developments of parent
company generates benefits far beyond those that could be obtained by infusion
of capital. It explains the interest of many governments to the fact that TNCs
have research centers (capacities) in their countries. An integral part of the
technology transfer is the management skills that are the most significant
components of foreign direct investment.
The principles of
technology transfer are usually the following: 1. The usefulness of the
technology. 2. Favorable social and
economic conditions for the transfer. 3.
The willingness and ability of the host country to use and adapt the
technology. In the industrialized countries, complex technological processes
are economically justified, and specialists from these countries are able to
solve the problems and develop technology. The problems occur in the less
developed countries with little industrial experience. Production capacity must
be adapted to the production in small series; equipment and operations should
be very simplified due to the lack of qualified and trained personnel. In most
cases, in these countries the quality is only reaching the world standards. To
overcome these problems, for example, the electronics giant ‘Philips’ created a
special experimental plant. The plant contributes to the fact that a lot of
elements, defining the possibility of production functioning, are adapted to
the local circumstances, and thus the necessary know-how and other elements are
transferred to the developing countries. Technology transfer increases with the
growth of the industrialization, which will create not only the demand for new
technologies, but also complicate the processes and technology in the existing
economic sectors.
The
consequences of foreign direct investments
Foreign direct
investment has a significant impact on the socio-economic development of
investing countries (where the capital comes from) and destination countries
(where the capital comes in), on different social groups in these countries,
and on the state and dynamics of the world economy as a whole and of individual
regions as well. The analysis of FDI impact on the well-being of the individual
groups of population shows that foreign direct investment brings the following:
benefits: a) to
foreign firms and investors; b) to
workers of the receiving country (workplaces);
c) to the population of the receiving country from a possible increase
of social services because of taxes on incomes from FDI;
losses: a) to workers of an investing country, as FDI
means exports of workplaces; b) to
competing firms in the receiving country;
c) to taxpayers of an investing country, as profits of TNCs are more
difficult to tax and the government either shift the shortfall in tax revenue
to other payers or reduce the budget-funded social programs.
The general conclusion
of economists, analyzing FDI is as follows: 1) an investing country generally
wins because the benefits for investors are more than losses of workplaces and
other categories of persons in the home base country; 2) a receiving country
also generally wins, because the benefits for workers and other categories of
persons are more than the losses to investors of the receiving country who are
forced to compete with firms that have technological, managerial and other
advantages. The simultaneous existence of both costs and benefits breeds
differences in the business world, among politicians, scientists and economists
about foreign investment. In many countries, FDI gives birth to nationalistic
sentiments. In the USA, for example, according to the survey, 48% of Americans
are opposed to Japanese investment and only 18% agree to take them. The
position of the developing countries is ambivalent. On the one hand, they fear
excessive foreign influence and exploitation and, on the other hand, the
disinvestment as a means of access to the latest technology, exports expansion,
etc. In many countries in the sphere of investment policy there are powerful
conflicting pressure groups, seeking to limit FDI inflow or their wide
attraction. In the home countries of TNCs, the lobbying influence of these
corporations on foreign policies of the governments often results in
international military conflicts in order to protect the interests of investing
firms that do not coincide with the interests of nations as a whole. In the
global scale, FDI, which reached $1.5 trillion in 2011, and $1.6 trillion in
2012, play a positive role. Their distribution by countries, economic sectors,
industries largely determines the structure of the world economy, relationship
between its separate parts. Foreign direct investment for TNCs is an instrument
of establishing of the system of international production, placed in many
countries, but controlled from one centre.
The
Nature of Portfolio Investment
International portfolio
investment is a capital investment in foreign securities, giving an investor no
right to control the object of investment, but giving only a priority right to
receive income according to the purchased share of the ‘portfolio’ of the
investment object, which in international practice generally does not exceed
10%. International investment portfolio of an individual company includes the
following:
1) shares;
2) debt securities:
а) bonds, promissory
notes, loan notes,
b) money market
instruments: treasury bills; deposit certificates of a bank; banker
acceptances, etc.;
3) financial
derivatives. The main motivation to
implement international portfolio investment is the receiving of higher income
abroad. For example, residents of one country buy securities of another country
if the revenues there are higher. It leads to the international leveling of
incomes. However, this explanation for the reasons of international portfolio
investment does not take into account the fact that the flow of capital is
bilateral. If incomes from securities in one country are lower than in the
other one, then it explains the flow of investment from one country to another
one. However, it is incompatible with the simultaneous capital flow in the
opposite direction. To explain a bilateral capital flow, an element of risk
must be taken into consideration. Investors are interested not only in profit,
but also in a lower risk, associated with a specific type of investment. Thus,
the risk of owning the bonds is linked with the possibility of bankruptcy and
change of their market price, and the risk of the shareholding is in the
possibility of bankruptcy, significant fluctuations of their market rate and
the possibility of getting lower incomes. Thus, investors try to maximize the
profits with an acceptable level of risk. There is a certain link between
profitability of securities and risk of their acquisition: the higher profit an
investor can get, the higher is the risk. For example, the revenue from the
shares of company A and company B is on average 30%. However, with equal
probability, the profit from share A can be from 20% to 40%, and the profit
from share B is from 10% to 50%. Shares B are associated with greater risk,
because the range of values of the income for share B is much larger, so to
minimize the risk the investors should buy the shares of company A. If the
profit of shares A decreases with simultaneous increase of shares B and vice
versa, owning two shares, an investor can get in average 30% of the profit but
with lower risk. The portfolio theory is based on the assumption that profits
from securities may change over time in the opposite, and also the income can
be obtained with less risk, and higher income can be with the same level of
risk of the portfolio as a whole. As revenues from foreign securities are
typically higher than revenues from national securities, a portfolio which
includes national and foreign securities may have higher revenues and/or a
lower risk than a portfolio which is formed of only national securities. Such
balanced portfolio requires a two-way flow of capital. For example, if share A,
which has the same average profit like share B but a lower risk, is issued in
country I, while share B (with the opposite revenue to revenue A), is issued in
country II, portfolio investors of country I must also purchase share B
(investing in country II), and investors of country II must purchase share A
(investing in country I) for the balance of the investment portfolio. Thus,
reciprocal international portfolio flows are explained by the opportunity to
diversify risks. International portfolio investment rises as investors seek to
diversify their activities internationally to maximize the revenue with
regulated risk. The volume of international market of portfolio investment is
significantly greater than the international market's one of direct investment.
More than 90% of international portfolio investment takes place among the
developed countries.
International
Loan Capital Flows
International loan
capital flows are financial transactions, related to international loans,
crediting, bank deposits and transactions, which cannot be characterized as
direct, portfolio investment or reserve assets. International crediting and
loans are a movement of loan capital beyond the national boundaries of
countries between the entities of international economic relations, providing
currency and commodity resources under conditions of recurrence, urgency and
interest payment. Each country is an
exporter and an importer of capital. International credit is involved in the
turnover of capital in all stages, mediating its transition from one form to
another one: from cash to a productive, then to commodity and to cash again.
International credit is considered as a special kind of international trade.
This trade is not a one-time exchange of goods for goods, but supplying or
receiving goods today in exchange for receiving or return of goods in the
future. This exchange is called an intertemporal trade. In economics, there is
always a problem of choice between current and future consumption. As a rule,
the produced goods are not consumed immediately, some of them are used as a
productive capital for production expansion in order to increase consumption in
the future. In other words, it is a choice between the production of consumer
products now and in the future.
International credit gives you an opportunity to trade in time. If a
creditor country provides a loan, it sells the present consumption for future
consumption. A borrower-country, taking
a loan, can spend today more than earned, in exchange for the obligation to pay
compensation in the future for today’s consumption. The countries, taking loans,
and the countries, providing them, are determined by production capacity.
Countries with good current investment opportunities take loans from other
countries, which do not have such relative investment opportunities but have
great current incomes. Countries with relatively large financial resources in
comparison to their profitable use internally can increase their national
income by means of providing credit to the countries which have higher rate of
income on capital (percentage, dividend). An importer-country of capital
receives an opportunity to increase its national income at the expense of
foreign investment received in more favorable terms in comparison with the
internal terms of crediting. In general, through international credit there is
a maximization of the world product at the expense of the general increase in
world production. The importance of international crediting lie in a fact that
due to it there is the redistribution of capital among countries in accordance
with the needs and opportunities of more profitable use.
Creditors and borrowers
are banks, firms, public institutions, governments, international and regional
currency-credit and financial organizations.
The effectiveness of
crediting is reached upon condition that there are:
free movement of
capital;
stability and
predictability of the development of the world economy;
borrowers’
implementation of their obligations, full payment of their debts.
Development of
international crediting today is largely determined by the activities of TNCs
and its role's enhancement in the evolution of international economic
relations. The time limits for
performance of liability commitments (sale of property) play an important role
in the capital movement. They can be the
following: long-term (over 5-7
years); short-term (up to 1 year).
The main form of
international long-term crediting is international loans. Depending on who is
the creditor, they are divided into private, governmental credits, credits of
international and regional organizations.
Private loans are provided by major commercial banks in the world from
their resources. In recent years, the proportion of external credits in the
total export of loan capital of these banks has declined, but they do not lose
their status of major international creditors. Private long-term loans can be
provided not only by the resources of banks. Banks use the means of renters of
large countries for these purposes with the help of the bond loans (external
emissions). Investment banks place the securities (obligations) on the stock
market of their countries, issued by private foreign companies or governmental
agencies. Thus, creditors are big countries with a well-developed stock market
and a significant surplus of loan capital. However, not all obligations of
foreign loans are placed among other holders. Some part of the obligations with
high reliability and profitability are left by the banks for themselves,
receiving interest income from the loans (8-10% annually). Governmental loans (intergovernmental,
state loans) are given by government crediting institutions. A country assumes
all the costs connected with the loan, it relieves expenditures in case of
non-payment of debt. Loans of international organizations are given mainly by:
the International Monetary Fund; the structures of the World Bank; the
International Bank for Reconstruction and Development; regional development
banks and other credit and financial institutions. It should be noted that the
International Monetary Fund and the World Bank are not only the largest
creditors, but also coordinators of international crediting.
For the purpose
intended, international loans are divided into the following: production
credits for the development of national economy, which are sent to industry,
transport, agriculture (purchase of equipment, materials, licenses, productive
services, etc.); non-production credits to provide the government, the army,
the purchase of weapons, the payment of interest on foreign debts, etc. The
share of credits of non-production character in the total amount of foreign
credits increases. The movement of short-term loan capital has the following
forms: a) commercial and bank credit; b)
current accounts in foreign banks. Commercial (corporate) credit is widely used
in foreign trade and given by an exporter of one country to an importer of
another country in the form of a payment delay. In the commercial credit, a
loan operation is combined with the sale of goods, and the movement of loan
capital is combined with the movement of commodity capital. Bank short-term
crediting is the provision of funds in the monetary form on the security of
goods, commodity documents and bills. The cost of short-term credits is high
enough (6-9% annually). Commercial loans are commonly used by English, German,
French, Japanese firms for the purpose of foreign trade expansion. Companies
and banks use current accounts in foreign banks to attract free money capital
of other countries. Current accounts in foreign banks are characterized by high
mobility, variability, dependence on the economic and political conditions.
Thus, countries can use them with a view to the exploitation of less developed
countries (for example, to “freeze” the deposits that are formed as a result of
goods delivery).
The
international debt emerge
The practice of
international crediting clearly shows how the actual development of
international loan disagree with such conditions of normal work of the credit
system as stability and timely payment of debts. A tangible proof of mentioned above statement
is the global debt crisis. The main reason of the periodic occurrence of
international debt crisis is a presence of strong motivation of sovereign
debtors to refuse the payment of the debt. If the governments of the debt
countries come to the conclusion that all payment obligations do not provide
net inflow of funds in the future any more, there is an incentive to abandon
some or all payments of the debts but to avoid outflow of resources from
countries. A reason to stop paying by
the sovereign debtors helps explain some features of the behavior of
international creditors. One of them is perseverance in establishing a higher
interest rate in loans to foreign governments in comparison with the loans to
private and public borrowers in their own country. The requirement for a higher
interest rate is a way to get some kind of insurance award in case of
non-payment of debts: while there is no crisis, creditors receive this award,
but in case of a crisis they bear large losses. What can solve the problem of
non-payment? It may not be a traditional offer, linking new loans to the debtor
with the requirement of "belt-tightening". To delay the time of
non-payment of debts, new loans should cover at least the payments of interest
and the principal sum of the loan. But even if the new loans are so high, their
provision increases the total amount of debt, which a debtor can finally refuse
to pay for, regardless of how long a new crediting lasts. A reliable way to solve a problem of right of
ownership of loans, granted to sovereign debtors, is the introduction of a
pledge or security, i.e. the assets of any type, which may go into the
ownership of the creditor in case of suspension of paying for the debt by the
borrower. In transactions on loans within a country, a legal loan or security
play an important role in maintaining of payments on debt and simultaneously
strengthen the creditability of the debtor, allowing him to obtain loans at a
lower interest rate and convenient temporary schema. In the past, the
countries, paying for their debts on time, were those whose creditors were able
to arrest the assets of the debtors in case of failure to meet the deadline of
payment terms. Despite the adoption of the measures by governments, the total
debt of countries of the world in 2012 was amounted to $69,080 billion ($62,500
billion in 2011). Over the last 10 years, the total debt of all countries of
the world increased by 2 times. Thus,
international debt is a serious problem in the world economy. The economic
situation of a country, as a result of the globalization of financial markets,
becomes more dependent on external resources, required to cover the budget
deficit, domestic investment, socio-economic reforms and execution of debt obligations.
Mobility and the scopes of capital flows depend on the level of the country's
development. Financial resources, received in the form of loans on the
commercial terms by a country, cause the incurring of external debt, since they
require appropriate payment.
External debt is the
amount of financial obligations of a country owed to foreign creditors for
unpaid foreign loans and interests.
Long-term debt obligations of a country include the following: the external public (official) debt, which
is the amount of obligations of central and local state bodies to external
creditors for unpaid loans and interest. External creditors can be foreign
governments, central banks, governmental bodies, international and regional
monetary and financial organizations; the state-guaranteed debt, i.e. an
obligation of private firms, banks, companies, where the guarantor of payment
is the country; private non-guaranteed debt, i.e. a debt of private borrowers
that is not guaranteed by a country. It occurs when a borrower receives bank
and other loans by means of purchasing debt securities in the international
stock market. External debt service
payments are usually made in a foreign currency. Return of loans by sovereign
debtors is the most possible in terms of their capacity to pay debt. Therefore,
the creditors are ready for debt restructuring. Debt restructuring is a
rescheduling of debt obligations, which have an expired payment term. Debt
restructuring is used to alleviate the debt burden of the least developed
countries and countries with economies in transition. International practice
accepted the concordance of this process within the Paris Club of official creditors and London Club of private
creditors. The measures of debt restructuring include transfer payments,
reduction of the amount of debt or its full cancellation, conversion of debt
into national assets of a debtor-countries and recapitalization. The mechanism
of recapitalization involves exchanging debts for obligations of debtors, or
providing them with new target loans to pay off former debts. Recapitalization
is the most popular measure for restructuring the debt to commercial bank
creditors. This mechanism was adopted in 1989, and is called the Brady Plan.
According to the plan, banks restructure some part of the debt of the
developing country (usually it is a lower interest payment) only if its
government implements a more radical program of macroeconomic and structural
changes. Every creditor bank has the right to choose the methods of restructuring
that are foreseen in the contract. However, on the basis of existing practice,
banks choose an Advisory Committee that represents the interests of all
creditor banks and negotiates with the debtor government. Analyzing the results
of the multilateral programs of overcoming the international debt crisis of the
developing countries, the World Bank came to the following conclusions: 1. A
major role in the economic development of a country is not played by external
financing (loans and assistance), but by internal resources and a balanced
economic policy. The nature of external debt of the country and its
restructuring 2. The focus on external capital leads in the long term to a
greater dependence of the socio-economic development of the country on unfavorable
external events. External financing can play a positive role only when it
complements and reinforces a healthy domestic economic policy. Debt
restructuring requires an economic policy, endorsed by the IMF, from a
debtor-country. However, the practice of implementation of the IMF
recommendations, without taking into account a country specificity, in many
cases leads to a deterioration of the economy, causes social conflicts, forcing
to abandon some of the requirements of the IMF and thus makes the debt crisis
difficult to overcome.
International Labor Migration
The
Causes of International Labor Migration
International labor
migration is the mobility of labor from one country to another for a period
more than one year. International labor migration covers the whole world: both
the development part and the underdeveloped periphery. Currently there are more
than 214 million of international migrants. International migration of the
population has played an increasingly significant role in the development of
societies and has become a global process that covered almost all the
continents and countries, as well as various social strata. The total number of
international migrants increases continuously. More than half of migrants come
from developing countries and countries with economies in transition. From
these countries over the past 5 years, industrialized nations have taken 12
million migrants, in other words, the annual inflow of migrants is an average
of 2.3 million people, of whom 1.4 million went into the North America and 800
thousand - into the Europe. International labor migration is one of the objective
bases of becoming an integrated international system. At the same time, the
problem of free migration is the most dangerous for governments, both
politically and in the social aspect. Ethnic and religious superstition and
direct economic threat to the interests of particular groups who are afraid of
competition from immigrants make this problem too spicy. For politicians, the
issue of migration is a "hot potato that it is better not to take out of
the fire ". Therefore, during the migration policy implementation is very
important to know the nature and general economic and social implications. The
international migration consists of the two basic interdependent processes: emigration and immigration. Emigration
is a departure of labor from one country to another, immigration is the
entrance of labor to the receiving country. Also as part of international flows
of people distinguish remigration, which is the return of the labor to the
country of emigration.
The
main forms of migration:
permanent migration.
This form of migration prevailed over others before World War I and is
characterized by the fact that lots of people were left their countries for the
permanent residence in the USA, Canada, Australia for ever;
time migration
providing the migrant’s homecoming on the expiration of certain term. In this
connection it is necessary to notice that modern labor migration has got
rotational character;
the illegal
migration, which rather favorable to businessmen of the country of immigration
and makes an original reserve of cheap labor necessary for them.
Differently directed
flows of labor, which cross national borders, form the international labor
market functioning in interrelation with the markets of the capital, the goods
and services. In other words, the international labor market exists in the form
of labor migration. The international labor migration is caused by both factors
of internal economic development of each separate country and external factors:
a condition of the international economy as whole and economic relations
between the countries. During the certain periods as motive forces of the
international labor mobility could be the political, military, religious,
national, cultural, family and other social factors. The reasons of the
international labor migration can be understood also only as concrete set of
the named factors.
Traditionally (in the
neoclassical theory) as the basic allocate the economic reason of the
international labor migration connected with scales, rates and structure of
accumulation of the capital.
1. Differences in rates
of accumulation of the capital cause the differences between an attractive and
the repulsive forces of labor in various regions of the world economy that
finally defines directions of moving of this factor of production between the
countries.
2. Level and scales of
accumulation of the capital have direct influence on an occupation level of
able-bodied population and, thus, on the sizes of a relative overpopulation
(unemployment), which is the basic source of labor migration.
3. Rates and the sizes
of accumulation of the capital, in turn, in certain degree depend on migration
level. This dependence means that rather low salary of immigrants and
possibility to reduce payment to domestic workers allows to reduce the
production costs and thereby increase the accumulation of capital. The same
purpose is reached by the organization of production in the countries with
low-paid labor. Transnational corporations for the purpose of acceleration of
accumulation of the capital use either the labor movement to the capital, or
move the capital to the regions with excessive amount of labor.
4. The reason of the
labor movement is changes in the pattern of requirements and the production
caused by scientific and technical progress. The production cutback or
liquidation of some out-of-date branches release labor which searches for its
applications in other countries. So, the international labor migration, first
of all, is the form of movement concerning surplus population from one centre
of accumulation of the capital to another. It is the economic nature of labor
migration. However in the international labor migration not only the
unemployed, but also a part of the working population are involved. In this case,
the driving motive of migration is the search of more favorable working
conditions. The labor moves from the countries with a low standard of living
and salaries to the countries with higher ones. So, an objective basis of labor
migration is national distinctions in the level of wages.
The
Main Stages of International Labor Migration
Historically, there are
four stages of the international labor migration.
First
stage of the international migration is directly
connected with industrial revolution which was held in Europe from the end of
the eighteenth century right up until the middle of the nineteenth. A
consequence of this revolution was that accumulation of capital was accompanied
by growth of its organic structure. The latter has led to formation of “the
relative overpopulation” that caused mass emigration from Europe to the North
America, Australia, and New Zealand. It has begun the formation of the world
labor market. Formation of the world labor market promoted: the economic development in the countries
of immigration as satisfied the critical need of these countries for labor
resources in the conditions of high rates of accumulation of the capital and
the absence of reserves of attraction of labor; the colonization of earth's
areas with few population and the new countries' retraction in the system of
the world economy.
Second
stage of international labor migration covers the period
from 18th century to the First World War. The scales of accumulation of the capital
considerably increased during this period. Also, this period is characterized
by the strengthening of unevenness of this process within the limits of the
world economy. The high level of concentration of both production and capital
in the advanced countries (the USA, Great Britain etc.) causes the increased
demand for additional labor, stimulates immigration from less developed
countries (the backward countries of Europe, India, China etc.). The general and
qualifying structures of migrants change in this conditions. In the beginning
of the 20th century the basic mass of migrants was formed by unskilled labor.
Third
stage of development of the international migration
covers the period between two World Wars. The feature of this stage is the
reduction of scales of the international labor migration, including
intercontinental migration and even remigration from the USA as the classical
country of immigration. It has been caused by following reasons: 1)
consequences of a world economic crisis in years 1929 — 1933, the nature of
which was in the unemployment growth in the developed countries, and necessity
of restriction of migratory processes; 2) closed-totalitarian character of
development of the USSR, which excluded it from a circle of the countries of
labor emigration. Fourth stage of
development of the international labor migration has begun after the Second
World War to date. This stage is caused
by: a scientific and technological revolution; monopolization of the
international markets of labor and capital; internationalization and
integration processes. Its characteristic features: growth of
intercontinental migration, in particular in Europe and Africa; increase in
demand from modern production on highly-skilled personnel, the occurrence of a
new kind of the labor migration, which have received the name of "the
brain drain"; strengthening of the state and international regulation of
labor migration. Nowadays, such directions of the international labor migration
were generated: migration from developing countries to industrially developed
countries; migration within the limits of industrially developed countries;
labor migration between developing countries; migration of scientists and the
qualified experts from industrially developed countries to the developing ones;
migration from the former Union of Soviet Socialist Republics to the
developed countries; labor migration of within the limits of the former USSR.
The
Modern Centers of International Labor Migration
The international labor
migration in modern conditions has got character of the global process.
Migration captures the majority of the countries of the world. The quantity of
the countries involved in the international migratory process, has essentially
increased, first of all at the expense of Central and Eastern Europe, as well
as CIS. According to the experts' forecast, the quantity of migrants which are
accepted by the developed countries, will remain at high level in the nearest
decades. In 2011, countries leading in
emigration were Mexico, India, China, Russia, Ukraine and, in turn, countries
leading in immigration were the USA, Russia, Germany, Saudi Arabia and Canada.
As the major centers of gravity of foreign workers, which define modern
directions of the international labor migration, can be identified: North and
South America, Western Europe, South-East and Western Asia. In beginning of the
21st century annual inflow averaged 2,3
million people, 1,4 million people of whom went to the North America, and 800
million people - to Europe. The largest centers of attraction of migrants are
the USA and Canada (their readiness to accept foreigners is estimated
accordingly in 1.1 million people and 211 thousand people accordantly). The
defying competition ones are countries of Western Europe, where the aggregate
number of the people captured by migration during the post-war period, is
estimated in 30 million people. It is characteristic that last 20 years over 1
million people annually moves, looking for a job, from one European country to
another, i.e. take part in an intercontinental interstate exchange of labor.
For modern European migrations such directions are characteristic: from less
developed countries of Southern and Eastern Europe (Greece, Spain, Turkey,
Poland, Hungary, etc.) to the advanced countries of Western and Northern Europe
(France, England, Germany, Sweden, etc.); from the countries of North Africa,
India, Pakistan to the West European labor market; labor movements from one
advanced country to another. Emigration in the countries of the European Union
has increased. Number of the foreigners living today in the EU countries reaches
17 - 21million people, 12-14 million
people of whom (about 4 % of the population of EU) arrived from the countries
which are not members of the Union: 29 % of migrants are citizens of Turkey and
former Yugoslavia; 20,7 % — citizens of the African countries, 7 % — Americas,
13,6 % — Asia, 7,8 % — the countries of Central and Eastern Europe. Among the
EU countries which have accepted the foreigners, the first places occupy:
Germany (over 7 million people); France (about 5 million people) and Great
Britain (about 3 million people). The main countries of emigration to Germany
are Turkey, the countries of the former Yugoslavia, Italy, Greece and Poland;
to France – Algeria, Morocco and Portugal; to Great Britain – India. The
important centre of gravity of labor is Australia. The area of Persian Gulf
became new point of concentration of international groups of labor, where in
1975 the aggregate number of nonlocal population in 6 countries (Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) id 2 million
people, and in the beginning of the 21st century - 4 million people, or about
40 % of all population. The most part of the Arabian emigrants arrives from
Palestine, Egypt, Iraq, Syria, Jordan. On the African continent the centers of
gravity are the countries of Southern and Central Africa. The aggregate number
of migrants in all countries of Africa reaches 6 million people Along with
Western Europe, for last two decades the new centers of gravity of foreign
workers reflecting labor migration from one developing country to another,
moving of foreign labor from more developed to less developed countries, which
in general was not characteristic for interstate migration in the past. These
include, in the first place, “the new industrial countries” of Asian-Pacific
region. And in Latin America they are Argentina, Venezuela, Brazil. The largest
direction of migration in the world is the Mexico - United States one: in 2011
the number of migrants amounted to 11.6 million people. The next ones by the volume
are: Russia - Ukraine, Ukraine - Russia, Bangladesh - India; in these
directions, many indigenous people were migrants without moving to other
countries, as a result of the establishment of new state borders.
As regards the
structure of migrating labor, there are following main regularities. Structure
of labor, which migrates to industrially developed countries and between the
developed countries, is characterized by two moments. The first one: the
necessity of a high share of the highly skilled and scientific personnel for
development of new directions of scientific and technical progress.
Industrially developed countries stimulate such moving of labor with the right
of reception of the status of the constant resident. So, the share of
foreigners among engineers in the USA is over 10 %, doctors – over 20 %. “The
brain drain” in the USA occurs from both the developing countries and the
countries with economies in transition. Within the EU the highly-skilled
personnel concentrates in the most developed countries. The second one: there
is a considerable share of labor for branches with physically heavy, low
qualification and unattractive kinds of work. For example, in France emigrants
make 25 % of all occupied in building, 1/3 – in motor industry. In Belgium they
make half of all miners, in Switzerland – 40 % of building workers. Migration
of labor between developing countries is mainly migration between new industrial
countries and OPEC member countries, on the one hand, to other developing
countries, on the other hand. The basic structure of migrants from these
countries is semi-skilled labor. Rather small flow of skilled labor goes from
the developed countries to developing ones. For migration within former world
system of a socialism is characteristic the moving of labor from the countries
with less favorable social and economic conditions to the countries with more
stable economy and social conditions.
The
consequences of International Labor Migration
Consequences of the
international labor migration are various enough. They show up in the countries
of emigration, as well as in the countries of immigration, bringing certain
benefits and losses to both parties. However, as analysis shows, there are more
benefits obtaining by countries of immigration, and losses exceed benefits in
countries of emigration. The world as a whole wins, as migration freedom allows
people to move to the countries where they can bring more significant
contribution to world production.
The countries of
immigration obtain following benefits:
a) in the country
of skilled labor immigration, rates of
growth of economy are accelerated: additional demand for the goods and services
of immigrants stimulates growth of production and creates additional employment
in the country of their stay; b) there is the competitiveness increase of the
goods made by the country owing to the reduction of the production costs
connected with lower price of foreign labor and possibility to contain growth
of a salary of local workers due to increased competition on a labor market; c)
the host country wins at the expense of the taxes which size depends on
qualifying and age structure of immigrants. The highly skilled experts already
knowing language of host country become large taxpayers at once; d) the considerable
income brings a transfer of knowledge from the emigration country. When the
host country imports the skilled labor and scientists, it saves expenditure for
education and professional trainings. So, 23 % of members of National academy
of Sciences and 33% of Nobel Prize winners are immigrants in the USA; e)
foreign workers are often considered as the certain shock-absorber on a case of
growth of unemployment: they can be fired first of all; f) immigrants improve a
demographic picture of the developed countries, suffering population aging. In
Germany, France and Sweden 10 % of all newborns appear in families of
immigrants, in Switzerland — 24 %, in Luxembourg — 38 %. The countries of
emigration also obtain certain benefits: a) decrease in a rate of unemployment
and, as consequence, - social pressure in the country; b) free labor training
for countries of emigration (new professional skills, knowledge of high
technology, the work management, etc.); c) reception of incomes in hard
currency as a result of remittances of emigrants. The remittances of migrants are a
considerable part of currency receipts of states that positively influences
national income of the state. It is one part of consequences of migration for
countries of emigration. On the other part, these countries sustain essential
losses from labor export: a) reduction of tax revenues because of reduction of
number of taxpayers; b) the constant migration cased an outflow of the
qualified, initiative workers, called "the brain drain", leading to
slowing down the rates of increase of scientific and technical and cultural
level of the country. By estimates of experts, these losses reach about 76
billion dollars. Such measures of the state can be possible ways of removal of
negative consequences of labor emigration: an emigration interdiction; the
tax introduction for the “brain drain” to compensate the state investments in
emigrants; creation of the high profit branches which are carrying out export
of labor.
International Technology Transfer
The Essences and Forms of the International
Technology Transfer
The international
technological exchange (technology transfer) is understood to be the complex of
the economic relations of different countries concerning the transfer of
scientific and technological achievements. The scientific and technical
knowledge being bought and sold in the world market, which is the result of
scientific research, engineering and experience of their commercial
exploitation, as well as engineering services for the use of scientific,
technical, technological and managerial developments. They are the objects of
intellectual property, possessing both scientific and commercial values. As
commodities they include the following: - a patent is a certificate, which is
issued by the proper government agency to an inventor and certifies its monopoly
for the use of the invention; - a
copyright is an exclusive right of an author of a literary, audio or video
product for display and reproduction of the work; - a trademark is a symbol (a picture, graphics,
combination of letters, etc.) of a particular organization which is used to
personalize the product manufacturer and which cannot be used by other
organizations without the official permission of the owner; - industrial
designs, which must be new and original; - non-divulged information (know-how),
which is secret and kept in secret, has commercial value and is provided to the
government and governmental organizations as a condition of approval for the
marketing of certain products; - a variety of technical, design, commercial and
marketing documentation. These products
of intellectual work belong to so-called nonmaterial forms of technology, and
trade operations in international practice are commonly referred to as
international technological exchange. Thus, international technological
exchange is understood to be the complex of economic relations between
contractors of different countries for the transfer of scientific and
technological achievements (nonmaterial types of technology) with scientific
and practical values, on the commercial basis. It should be noted that there
are also noncommercial forms of international technological exchange:
technical, scientific and professional journals, patent publications,
periodicals and other specialized literature; database and databanks;
international exhibitions, fairs, symposia, conferences; exchange of delegations; migration of
scientists and specialists; training of scientists and specialists in
companies, universities and organizations;
education of undergraduate and graduate students; activities of
international organizations in the field of science and technology.
Under modern
conditions, international technological exchange has certain features:
1. The development of
market of high technologies. The generally accepted classification of high
technologies for exports and imports of products, containing new and leading
technology, is the classification developed in the USA, which is used by
international organizations for statistical comparisons of different countries.
The classification system allows to explore the trade in products of high
technology in 10 main technological sectors: biotechnology; human life science
technology; optoelectronics; computers and telecommunications; electronics;
computerized production; new materials; aerospace technology; armament; nuclear
technology.
2. The monopoly of
large firms in technology markets. Research and development are concentrated in
the largest firms of the industrialized countries, since only they have
sufficient financial means for expensive research. Transnational corporations
actively attract for R&D their foreign subsidiaries, characterized by
increasing the expenses for scientific research in the total amount of the
expenses of TNCs.
3. Technology policy of
TNCs. In recent years there have been changes in the trends of R&D of TNCs.
Research moves to the industries that determine success in the production and
marketing activities: enhancement of traditional kinds of products to meet
the requirements of the world market concerning the indicators of in material
intensity, energy efficiency, security, reliability, etc.; creation of
innovative products, market research, where you can expect high returns; improvement of the existing technology and
creation of a new one. TNCs apply new
approaches to the transfer of scientific and technological achievements: sale
of licenses at the initial stages of the life cycle of products, in order to
cover the expenses for R&D by incomes from realization of their results;
establishment of exclusively high prices for the patented products, and
limitation of the production and output of a new product by license buyers;
agreement undertaking between TNCs to obtain exclusive rights to the patents
for the most important inventions. The use of patents to control technique
development or to hamper this development; deprivation of TNCs subsidiaries
the autonomy in the choice of equipment and technology. They should be guided
by the general licensing policy within the TNCs; TNCs transmission of licenses
in non-commercial terms to their subsidiaries and affiliates; the
establishment of strategic alliances between TNCs from different countries to
solve jointly the scientific and technological problems.
4. Relationship between
TNCs and the developing countries. TNCs try to create a structure of
international division of labor, which would provide economic and technical
dependency of the developing countries. For example, in these countries, TNCs
create enterprises that produce components that are supplied to the
subsidiaries in other countries. Transferring the technology for manufacturing
intermediate products to the countries with cheap labor force, a TNCs reduces
the cost of their goods. TNCs often moves to the developing countries the
production of goods, the lifecycle of which expired and the profit from sales
gradually decreases. They receive these goods at low prices and then sell them
through their marketing network under their well-known trademark, getting a
higher profit. A technology, which is
transferred to the developing countries, is generally ill-adapted to their
possibilities, because it takes into account the level of development and the
structure of the industry in the developed countries. The developing countries
account for about 10% of international technological exchange due to the small
capacity of their technological market.
5. Participation in
international technological exchange of “venture” firms (small and mid-sized
firms employing up to 1 thousand people). The advantage of these firms in the
market of technologies is a narrow specialization. Producing a limited product
line, these firms have access to highly specialized global markets; they do not
bear additional expenses for market research, advertising; they pay more attention
to the direct solving of scientific and technical problems.
6. Development of
international technical assistance. This assistance is provided by the
developed countries to the developing countries and countries with economies in
transition in the field of the transfer of technical knowledge, experience,
technologies, technology-intensive products, personnel trainings. The main buyers in the market of
technologies are as follows: foreign subsidiaries of TNCs; individual
independent firms. Transfer of TNCs’
new technologies to their foreign branches is conditioned by the fact that:
overcoming the disagreement between the need for greater use of the latest
technical developments with a view to maximize the profits and resulting
therefrom threat of losing their monopoly for scientific and technological
achievements; decreasing the specific costs for R&D; excluding the
outflow of production secrets beyond the boundaries of TNCs; increasing the
profit of the parent company (since in most countries the payments for the new
technology reception are exempted from taxes). Independent firms usually buy
technology of the industries where the expenses for R&D are small
(metallurgy, metal processing, textile and clothing industry). Products of intellectual
labor are sold in the world market through sales or by means of establishing
the relations arising in connection with obtaining of a temporary right to use
the results of scientific research and development on the basis of
international licensing agreements, as well as contracts for engineering
services.
CURRENCY STRUCTURE IN THE GLOBAL ECONOMY
POLITICS OF DEBT CRISIS
Mismanaged
Lending
Backbone
to Globalization
CURRENCY STRUCTURE IN THE GLOBAL ECONOMY
The term "currency" in the broad sense is any product that is able to act as a medium of exchange in both domestic and international payments. In a narrower sense, it is the available supply of money, which passes from hand to hand in the form of banknotes and coins. Currency provides communication and interaction of national and world economy. Depending on the belonging (status), currencies are divided into national, foreign and international (regional) ones. National currency is the statutory means of payment of the country: the currency notes in the form of banknotes, bills and coins or other forms that circulate and are legal means of payment in the country, as well as payment documents and other securities (stocks, bonds, coupons for them, bills of credit (transfer note), loan notes, letters of credit, checks, bank orders, certificates of deposit, savings books and other financial and banking documents), denominated in the currency of that country. The national currency is the basis of the national monetary system. Foreign currency is the currency notes of foreign countries, credit and payment instruments, denominated in foreign currency units and used in international payments. International (regional) currency is an international or regional monetary unit of account, means of payment and reserves. For example, the SDR (Special Drawing Right) is an international means of payment, which is used by the IMF for noncash international payments through the records in special accounts, and the payment unit of the IMF, the Euro is a regional international payment unit of the EU's countries. In relation to the currency reserves of the country, there are distinguished the reserve currency. Under the reserve currency realize the foreign currency, in which the central banks of other countries accumulate and store reserves for international payments on foreign trade transaction and foreign investment.
We also have strong (hard) and weak (soft) currency. Hard currency is characterized by a stable exchange rate. The concept of hard currency is often used as a synonym for convertible currency. On material form, the currency can be cash and cashless.
Currencies usually exchange not only one for another, but also in a certain ratio, which is determined by their relative value and is called the exchange rate. "The currency exchange rate" is:
1) the number of units of one currency required to purchase a unit of another currency;
2) the market price of one currency denominated in another currency;
3) the aggregate price of currencies, interconnected by a tripartite arbitration. The subject of the currency operation is the exchange of currency of one country for the currency of another country. Each national currency has a determined price, which is denominated in currency units of another country. This price is called the currency exchange rate. Prices of currencies are published daily. Prices for fully convertible currency are determined in the foreign exchange market and based on supply and demand for it, and in countries with a partially convertible currency, its price fixed by the central bank.
The nominal exchange rate. This is the rate between two currencies, that is, the relative price of two currencies (the proposal to exchange one currency for another one). For example, the nominal exchange rate of the dollar to the pound sterling equals 2.00 USD / 1 GBP. Determination of the nominal exchange rate coincides with the general definition of the exchange rate and is set on the currency market. It is used in the foreign exchange contracts and is the simplest and the most basic definition of the exchange rate. However, it is not very suitable for long-term forecasting, because the cost of foreign and national currencies are changing at a time with the change in the overall price level in the country.
The real exchange rate. This is the nominal exchange rate adjusted for relative level of prices in home country and in that country, to whose currency the local currency is quoted. The real exchange rate is a comparison of purchasing power of the two currencies.
The fixed exchange rate regime is a system in which the exchange rate is fixed, and its changes under the influence of fluctuations in supply and demand eliminated by government stabilization measures. The classic form of fixed rate is the currency system of the "gold standard", when each country sets the gold content of its currency. Exchange rates in this case are fixed ratio of the gold content of currencies. The fixed exchange rate can be fixed in different ways:
1. Fixation of the national currency to the exchange rate of the most significant currencies of international payments.
2. Using the currencies of other countries as a legal means of payment.
3. Fixation of the national currency to the currencies of other countries, which are the main trading partners.
4. Fixation of the national currency to the collective currency units, such as SDR.
The advantages of fixed exchange rates should include the fact that when the rate is stable, it:
- provides companies with a sound basis for planning and price formation;
- limits domestic monetary policy;
- has positive impact on the underdeveloped financial markets and financial instruments.
Disadvantages of fixed exchange rates are as follows:
if they are not trustable, they can succumb to speculative activities, which can further cause the rejection of a fixed exchange rates;
there is no reliable way to determine whether the chosen rate optimal and stable;
the fixed rate provides the readiness of the central bank to carry out the currency intervention in order to support it .
The whole system of fixed exchange rate can only solve short-term problems associated primarily with high inflation and instability of the national currency. In the long run such a currency regime is unacceptable, because the differences in the growth rate of production capacity is not being adequately reflected in the changes in relative prices and the allocation of resources among different groups of goods and services, resulting in accumulated imbalances in the structure of the national economy.
In countries with market economy and a high level of income, as a rule, there are market (floating) exchange rates. Flexible or freely floating exchange rates mean the regime, whereby exchange rates are determined by the untrammeled play of supply and demand. The currencies market is balanced by means of the price, i.e. rate mechanism.
Advantage of market exchange rates is that they, because of free fluctuations in the demand for the currency and its supply,
- are automatically adjusted in such a way that eventually unbalanced payments are eliminated;-
- the black marketers have no possibility to make a profit at the expense of the central bank;
- the central bank does not need to carry out currency interventions.
The disadvantages
- are the fact that markets do not always work with a perfect effectiveness,
- and therefore there is a risk that the exchange rate will be on the unreasonable by economic forecasts level for a long time;
-the uncertainty about the future exchange rate may create problems for the company in the field of planning and price forming.
Compromise exchange rates mean the regime, at which the elements of fixation and free floating of exchange rates are combined, and regulation of the foreign exchange market only partially implemented by the movements of the exchange rates by themselves.
The Demand and Supply for the Foreign Currency
The demand for the foreign currency appears from the need to buy goods and services abroad. The demand for the currency of any country in the foreign exchange market indicates that there is a demand of foreigners for goods and services of this country. The level of demand for the currency depends on the price of the offered good. With the decline in prices of goods more buyers are willing and able to buy it. Buyers who want to buy foreign goods, will need a currency of the selling country in exchange for local currency at the price prevailing in the market that is at the exchange rate. The demand for currency of the seller of goods will depend on the price of foreign currency (the exchange rate). The supply of currency by the selling country appears, in its turn, due the necessity to buy the goods (i.e. the demand for the product) in the purchasing country of its products. In market economy currency price fluctuates under the influence of supply and demand. If the exchange rate is too high, the currency supply exceeds demand, and price of the currency will decline. If the price is too low, demand will exceed supply, and the rate will increase. Due to these fluctuations it is composed the price equation of currency or the market price. The market price is the exchange rate at which the supply of currency in the foreign exchange market is equal to the demand for it.
The Factors Affecting the Exchange Rate
The long-term fundamental factors, determining the exchange rate movements,
- are the processes in the area of national production and circulation. This, above all, the relative (relative to the world level) labor productivity and, respectively, production costs, the long-term growth rates of the GNP, the place and role in world trade and the export of capital. The relatively faster productivity growth in one country (the relative increase in labor productivity) in the long run leads to higher relative purchasing power of national currencies in relation to the goods and therefore to the increase of the exchange rate of the country. This makes it possible to predict the long-term development of the exchange rates.
- The higher production costs and prices in the country (less than labor productivity) compared to the world ones, the more imports rise in comparison with exports, leading to a depreciation of the currency, and vice versa. This factor is called "purchasing power parity" (PPP).
- The growth of national income of the country, leading to increased demand for imported goods, generates demand for the currency of the importing country and the tendency to the depreciation of the national currency. And the rise in exports associated with the growth of national income in the other country, generates an upward tendency of the national currency of the exporting country.
- Inflation, its rate compared with the rate of depreciation of major currencies. The higher rates of national inflation, other things being equal, lead to a decrease of the exchange rate of the country in relation to countries with relatively low rates of depreciation of money.
- the relative level of real interest rates, that is, the nominal interest rate adjusted for the inflation rate. The relative level of real interest rates regulates the flow of capital between countries. The increase in interest rates makes the country attractive for investment funds, thereby increasing the supply of foreign currency and the demand for the national currency. Low interest rates limit or cause the capital outflows, in consequences of which the demand for foreign currency increases. Accordingly, the exchange rate has the same behavior. In the first case, it has a tendency to increase, and in the second - to decrease. Thus, a stronger inflation and lower real interest rates lead to a depreciation of the currency.
- The balance of payments of the country also affects the exchange rate. Generally, the passive balance worsens the situation in the world market of a particular currency, as the demand for foreign currency exceeds its offer, and the active balance - improves, as the supply of foreign currency exceeds the demand for it. The balance of payments, also known as balance of international payments and abbreviated B.O.P., of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period.
- Short-term fluctuations in exchange rates depend on the psychological factor - market "expectations" of participants of the foreign exchange market (guesses of bankers and dealers concerning the prospects of the dynamics of the rate of a particular currency, currencies interventions, etc.), generating all kinds of speculation in the currency markets, including speculative capital flows. Expectation of a further decrease (increase) of the exchange rate creates longing to get free (or buy) from this currency, which leads to an even greater decrease (increase) of the exchange rate.
- Currency intervention, that is the intervention of central banks and treasuries into the currency operations, conducted to both improve and reduce the exchange rate of their country or foreign currency. If it is set the objective to increase the exchange rate of the national currency, the banks and the treasuries recourse to massive sales of foreign currency and purchase of the national currency. If the country is interested in reducing the rate of its currency, the opposite process happens - massive buying of the foreign currency and selling of the national currency. The currency intervention can only temporarily affect the movement of exchange rates. The extent of its effectiveness depends on the amount of finance of ad hoc currency funds. The decline in the national currency promotes the dumping of goods. However, currency dumping brings additional revenue only when the external depreciation of currency, i.e. reduction of its exchange rate, is ahead of internal depreciation, i.e. decline in the purchasing power of money in the country. Only in this case, the product selling for the same (or lower) price in a foreign currency, the exporter swaps this currency to more of his own national currency as a result of the drop of the latest one. This allows him to buy more domestic equipment, raw materials and labor for the production expansion.
POLITICS OF DEBT CRISIS
DEBT CRISIS is
the general term for a proliferation of massive public debt both
domestic and external. Any situation in which an individual, company,
or country owes more to others than it can repay or pay interest on. It became
pronounced in the 1980s, thus threatening the stability of the international
banking system as many debtor countries became unable to service their debt.
In the developing world, there were severe financial crises in
both the 1980s and 90s. But the nature of crises was quite different between
the two decades.
In the 1980s, the world experienced a debt crisis in which highly
indebted Latin America and other developing regions were unable to repay the
debt, asking for help. The problem exploded in August 1982 as Mexico declared inability to service its international
debt, and the similar problem quickly spread to the rest of the world.
To counter this, macroeconomic tightening and "structural
adjustment" (liberalization and privatization) were administered, often
through the conditionality of the IMF and the World Bank. This crisis involved
long-term commercial bank debt which was accumulated in the public sector
(including debt owed by SOEs and guaranteed by the government). The governments
of developing countries were unable to repay the debt, so financial rescue
operations became necessary.
By contrast, the 1990s crises were more staggered and sequential
(not happening at the same time). We had
the Mexican crisis in 1994, the Asian crisis in 1997, the Russian crisis in
1998, the Brazilian crisis in 1999, the Argentine crisis in 2002, etc. [In
addition, we had big EMS currency crises in Europe in 1992 and 1993 but their
characteristics were different.] These crises were often caused by
short-term commercial bank debt and/or securities market investment. Particularly
in the case of the Asian crisis, the private sector (not the public sector) was
the main culprit. Banks, nonbanks and corporations over borrowed, and foreign
banks and private investors over lent. Huge capital outflows and severe
currency speculation often accompany these crises.
In both cases, Mexico had the honor of starting a new type of
financial crisis.
Generally speaking, instruments of external development finance
(other than FDI) can be classified as follows:
(1) Official
grants and loans (often concessional--i.e., at low interest rates and with
grace periods and long maturities)
(2a) Long-term commercial bank loans
(2b) Short-term commercial bank loans
(3) Securities markets (bonds, equity)
(2a) Long-term commercial bank loans
(2b) Short-term commercial bank loans
(3) Securities markets (bonds, equity)
This list is in the ascending order of instability. ODA flows are
more stable and predictable (unless you have a problem with big donors or
international organizations) while securities markets can be very volatile. In
the latter case, it is almost impossible even to identify who are the
investors.
The 1980s crisis was caused by (1) and (2a), especially the
latter. The 1990s crises were more often caused by (2b) and (3). The Asian
crisis of 1997-98 was mainly caused by (2b). This however does not mean that
all financial crises in the 1990s and 2000s are of the latter type. The old
type crises (caused by fiscal deficits) still occur today.
Insolvency versus illiquidity
When we discuss debt problems, we often hear these terms. There
are two types of inability to repay.
Insolvency means the borrower (or the borrowing country) is unable to
pay back, both today and in the future. It has spent money beyond its
inter-temporal budget constraint, so there is no way they can service the debt
in full, even if they try. In this case, waiting does not improve the situation.
The lenders must face the inevitable result that some (or even all) of the
money will not be repaid. The only solution is forgiving debt--give up the hope
of full repayment.
Illiquidity means the borrower (or the borrowing
country) is unable to pay back now, but it can pay back later. It just does not
have enough cash in the pocket (or not enough international reserves in the
central bank), but it expects future income or export receipts so debt will be
fully serviced (with added interest for late payment) in the future. In this
case, the appropriate response is delaying the repayment, or "debt
rescheduling."
Thus, the policy response should be very different depending on
whether the country is facing a solvency problem or a liquidity problem. The
first is more serious than the second.
But this is a theoretical distinction. The big problem is: it is
very difficult to distinguish the two cases in reality. When a crisis happens,
it is virtually impossible to tell precisely whether Russia, Argentina,
Thailand, or any other country has a solvency problem or a liquidity problem,
especially ex ante (before the event) but even ex
post (after the event).
There are more complications.
There are cases where the country wants to repay, but cannot
(inability). There are also cases where the country can repay, but will not
(unwillingness). Again, it is sometimes difficult to tell them apart.
Furthermore, insolvency or illiquidity may be the outcome of wrong
policy. If the government implements wrong measures, the problem can worsen
from illiquidity to insolvency. It is also possible that international
organizations impose wrong policy conditionality so the situation deteriorates.
Latin America and East Asia
When we consider the debt crisis in the 1980s and the currency crises
in the 1990s, an interesting comparison can be made between Latin America and
East Asia. While both regions were affected by these crises, Latin America was
more severely impacted by the 1980s crisis while East Asia was more directly
hit by the 1990s crisis.
After the Asian crisis of 1997-98, some people argued that the
high growth of East Asia was now over, the Asian development model was no
longer useful, and Asia would have hard time growing in the early 21st century.
It is true that some Asian economies (for example, Japan, the Philippines and
Indonesia) struggled economically and/or politically in the aftermath of the
crisis. But we also see strong growth dynamism too (for example, China, Vietnam
and Thailand). It is a bit of exaggeration to say that the Asian crisis
permanently and significantly reduced the growth prospects of the region. I
think East Asia is still dynamic, even with many problems.
In the long-term perspective, it is undeniable that East Asia as a
region has succeeded in sustaining growth and improving living standards. This
is in sharp contrast to the Latin American experience where consistent growth
has been highly elusive. In the 19th century, Argentina was one of the
"developed" countries with relatively high income. But since then,
its development path has been strewn with many instabilities. Even in the early
21st century, it remains a developing country saddled with gigantic economic
problems.
But if we take a long-run view and compare East Asia and Latin
America, it is hardly deniable that East Asia on the whole has succeeded more
brilliantly in economic development. Many economies in East Asia (but not all
of them--at least not yet) have raised income significantly and promoted
industrialization after political independence, and especially during the last
few decades. The question is WHY?
(Some say that Chile is really an East Asian country, with its
authoritarian past, disciplined policies and successful export promotion; and
the Philippines belongs to Latin America with its social conflicts, political
instability and low growth.)
Each country in East Asia is different, and each
country in Latin America is also unique. Therefore, generalization is not easy.
But at the risk of oversimplification,
we can list some of the typical characteristics of these regions which affect
their long-term development performance.
First and perhaps most important, inequality (between rich and poor, cities and country
side, white and non-white, etc) has remained and even intensified in Latin
America over the centuries. There seems to be a socially ingrained mechanism to
reinforce these social divisions in Latin America which continue even today. In
contrast, in most of the successful East Asian countries, social divisions as
initial conditions were less severe, governments have made effort to narrow
income gaps and unite different social groups, and growth (accompanied by
appropriate policies) generally reduced these gaps.
Second, generally speaking, Latin America is
more resource-rich while East Asia is less so (they are people-rich). As large endowment of natural resources is
often an impediment, rather than a help, to industrialization. One reason is
economic: the "Dutch Disease," or exchange rate overvaluation and
crowding out of limited domestic factors of production by the extractive
sector, suppresses the growth of other tradable industries. Another reason
which is important in Latin America is political: natural resources tend to
create strong vested interest groups around them (rich commercial farmers and
landlords, mining interests, etc). They favor overvaluation and free trade, and
oppose public investment for industrial growth. Because of their resistance,
industrial promotion policy is more difficult to implement in such countries. This
problem was largely nonexistent in East Asia.
Third, there was a difference in political
regime. Latin America had
"soft" states while East Asia had "hard" states. For a long
time, politics in Latin America was characterized by instability and oscillation
between militarism and populism (but now, almost all Latin American countries
are democratized). Populism is a
political system supported by many interest groups. The government must please
these groups continuously and simultaneously. Stability is maintained through
delicate political balancing acts. Wealth must be distributed among these
supporters. This prevents taking decisive action and making quick response. On
the contrary, East Asia typically had a top-down, non-democratic authoritarian
state as it initiated industrialization. Such a government is very strong and
does not have to appeal to various interest groups. If the leader is
intelligent and farsighted (a big "if"), it can have very agile and
dynamic policies. Some countries in East Asia still have such a regime.
Other differences include the social continuity after colonization
(original societies in Latin America were destroyed by the whites, while Asian
societies survived colonization) and growth strategy (import substitution was
continued longer and in a more counter-productive manner in Latin America).
------------------------------------------------------
Oil dollar recycling of the 1970s
The standard explanation of why the debt crisis occurred in the
1980s goes something like the following. We must first look at the 1970s for
the background and then see what happened in the 1980s. Between these two
decades, the financial flows surrounding developing countries changed
dramatically.
The 1970s was an inflationary decade. In
particular, there were two "oil shocks" in which the world oil price
was greatly increased due to political and military reasons, in 1973-74 and
1979-80. As a result, huge oil
export earnings flowed into the OPEC (Organization of Petroleum Exporting
Countries). At the same time, non-oil producing developing countries suffered
from ballooning trade deficits. As the graph below shows, the real price of oil
peaked around 1980. Although the nominal oil price is accelerating in recent
years, its inflation-adjusted level is currently not as high as in 1980.
Real Oil Price
(WTI in constant USD of July 2005)
(WTI in constant USD of July 2005)
Sources: National Post with data from Federal
Reserve Bank of St. Louis and the Bureau of Labor Statistics.
The world's purchasing power accumulated in OPEC but they had
little absorptive capacity. This means that they could not immediately invest
the money in domestic industrial projects. Their export earnings were deposited
at banks for the moment. The OPEC countries typically deposited their oil
receipts in dollar accounts located outside the US (remember, oil receipts are
in US dollars). These were called "euro" dollar deposits. How to
mobilize this huge euro-dollar deposits for global growth became a big
financial problem of the 1970s. This was called the problem of "oil dollar
recycling" (American English) or "petrodollar recycling"
(British English).
Here,
the adjective "euro" means outside the original issuing
country. For example, US dollar deposits outside the US (say, in London)
are called "euro-dollar deposits." Japanese yen bonds issued in New
York is called "euro-yen bonds," and so on. This term has no direct
relation to geographical Europe. The point is, in those days, "euro"
transactions were freer because they were outside the country which wanted to
regulate them. But as financial liberalization proceeded, even the original
country dropped regulation and added convenience of euro-money was gradually
lost. Today, this terminology has become obsolete and is used only in the
historical context. Virtually everyone thinks the euro is the currency unit of
Europe, not an adjective.
Large international commercial banks which received the OPEC money
decided to reinvest it in developing countries with good growth prospects.
Usually, a group of such banks got together and lent money to a developing
country endowed with a lot of primary commodity resources or "good"
industrial projects (Brazil, Mexico, Korea, Indonesia, etc). Such group lending
by banks is called "syndicated loans." These were long-term commercial
bank loans to the governments of developing countries (or to SOEs with
government guarantee). With ever-rising commodity prices, these investments
looked very safe and profitable.
Some of the developing countries were also very aggressive in
receiving such loans to promote national development projects. They were
optimistic and borrowed happily. As a result, they became heavily dependent on
foreign bank loans.
However, not all developing countries enjoyed foreign loans and
investment booms. Some non-oil producing developing countries as well as
industrial countries in North America, Europe and Japan were experiencing
"stagflation"--a situation of high inflation and stagnant output.
How the crisis occurred in the 1980s
 |
Paul
Volcker (1927-), Fed chairman 1979-87.
|
But good times do not last forever. As the new decade of the 1980s
began, the global economy shifted dramatically from inflation to recession.
In late 1979, Mr. Paul Volcker was appointed as a new chairman of
the US Federal Reserve Board (i.e., American central bank). Immediately, he
initiated an anti-inflation campaign. From 1979 to 1980, the Fed tightened
money supply. As a result, dollar interest rates shot up sharply, even to 20%
per year or above. Although this caused serious economic slowdown in the US and
the rest of the world, in the long run Mr. Volcker succeeded in stopping the
global inflation of the 1970s. But this process caused enormous strain for
highly indebted developing countries.
The tightening of American monetary policy impacted indebted
countries in three ways:
--As dollar interest
rates rose, debt service payments also rose sharply.
--Due to global recession, the quantitative demand for their exports fell.
--As commodity prices declined, they faced lower "terms of trade" (= export price/import price)
--Due to global recession, the quantitative demand for their exports fell.
--As commodity prices declined, they faced lower "terms of trade" (= export price/import price)
Thus, highly indebted countries suddenly faced payment
difficulties. Finally, in August 1982, Mexico said, "Sorry, we can't
service our debt any more." This ignited a global crisis. It was not just
Mexico that had the balance of payments problem. One by one, debtor countries
declared similar inability to repay.
As soon as the debt crisis broke out, foreign commercial banks
stopped lending to them, and began to think only of getting the money back. The
oil dollar recycling and syndicated loans were completely terminated. After
this, the financial rescue was extended to them by the IMF and the World Bank
in close collaboration with the US government. They extended loans to fill the
"financing gap," provided that the government of the affected country
took the "correct" adjustment policies. Ultimately, these official
loans were financed by developed countries through capital contributions and
loans.
Sometimes the amount of financial help needed was so huge that IMF
and World Bank loans were not enough. The international community provided
larger loans through the Paris
Club, a group of official lenders to a particular developing country,
which rescheduled existing debt or provided new money in
exchange for full servicing of the existing debt. (Technically, rescheduling means delaying the
payment of old debt and new money means extending new loans if
old debt is repaid as scheduled. But economically, they have the same
balance-of-payments impact). The Paris Club rescheduling (or new money) was
conditional on the existence of an IMF agreement. Bilateral official lenders
extended rescue loans only when the IMF itself had successfully negotiated a
new adjustment program (IMF loan with conditionality) with the country in
question. Hence the enormous power of the IMF vis-Ã -vis countries in
balance-of-payments trouble.
In addition, commercial bank lenders also negotiated debt
rescheduling through the London Club. While the Paris Club was
always held in Paris (French MOF), the London Club was not necessarily convened
in London.
Recovery strategy: adjustment plus debt relief
When providing a balance-of-payments rescue package, the IMF and
the World Bank always require that appropriate corrective policies be
undertaken (called conditionality). They provided the carrot and the stick.
In order to cope with the 1980s debt crisis, these international
organizations created new lending facilities such as:
--World Bank's
structural adjustment lending including "structural adjustment loan
(SAL)," at commercial interest rate, and "structural adjustment
credit (SAC)," at concessional interest rate
--IMF's structural adjustment facility (SAF) and enhanced
structural adjustment facility (ESAF)
Conditionality typically consisted of macroeconomic tightening
(budget cuts and low credit growth to reduce domestic expenditure, i.e.,
"absorption") and "structural adjustment" (deregulation,
privatization, trade liberalization, etc. to stimulate private supply response).
The theoretical background of this strategy was called neoclassical
development economics. Simply put, it assumes that the private sector will
grow strongly, once macroeconomic instability and government intervention are
removed.
In 1985, US Treasury Secretary James Baker initiated the Baker
Plan in which adjustment was combined with debt rescheduling and new
money. Fifteen highly indebted countries were designated as candidates. This
plan was based on the assumption that the problem was illiquidity so
delaying the repayment will solve the problem. The debt stock was not reduced
but the repayment schedule was simply pushed back into the future.
But when the delayed repayment approached, it was clear that the
indebted countries could not pay back and the balance-of-payments situation was
even worse than before. The problem was not illiquidity but insolvency.
It was gradually recognized that the real solution must come from cutting the
debt stock itself, not just from delaying the repayment.
Therefore, in 1989 another US Treasury Secretary Nicholas Brady
launched the Brady Plan, in which market-based debt reduction was
implemented. This meant that the indebted countries engaged in buying up their
own debt at discount in the secondary market using various techniques (debt
buyback, debt-equity swap, etc). These amounted to exchanging a large amount of
your own bad debt for a smaller amount of good debt (debt you must repay in
full). IMF and World Bank loans could be used for these operations. Mexico was
again the first country to take advantage of this scheme [the US is always very
kind to Mexico].
In addition, some countries of geopolitical importance
(particularly for the US) were accorded with very generous treatment. Poland
(in transition from socialism to market) and Egypt (US ally in the Gulf War
against Iraq) were given debt forgiveness in which loans
amounting to tens of billions of dollars were written off. They did not have to
repay later or buy back their own debt--their debt was simply canceled.
One justification of such debt reduction was furnished by
the Debt Laffer Curve. Originally, the Laffer Curve intended to
show that as the tax rate rises, the total tax revenue of the government
actually goes down beyond a certain point because people work less or try to
evade taxes. This means that there is a certain tax rate that maximizes the tax
revenue, and that lowering the tax rate may sometimes increase revenue (Arthur
Laffer is a business professor at MIT).
Similarly, the Debt Laffer Curve shows that as the external debt
stock rises, the indebted country will try to produce less (discouragement
effect) or intentionally default on the existing debt (sabotage) so the foreign
lenders will receive less than full repayment. Again, there is a critical debt
stock beyond which both the lenders and borrowers lose. If the debt stock is
already above this level, it is in the self-interest of the lenders to forgive
some of the debt. But in reality, it is very difficult to tell whether a
particular country has already reached this point or not.
The 1990s: optimism and new crises
With debt rescheduling and reduction, which were combined with
neoclassical policy conditionality, the debt crisis in many countries,
including those in Latin America and East Asia, were successfully contained. It
took about ten years, but by the early 1990s, Latin America declared graduation
from the "Lost Decade" and hoped for renewed growth. Inflation was
still a bit too high in Latin America, but their economies had been liberalized
and opened up externally thanks to the IMF and World Bank conditionalities, and
foreign investment began to return.
The developing and transition economies which open up their
financial sectors to invite foreigners to lend and invest in them are
called emerging market economies. In the early to mid 1990s, this
mode of attracting foreign funds became very fashionable. Many countries rushed
to liberalize capital accounts (for capital mobility) as well as current
accounts (for free trade) to absorb as much foreign savings as possible.
But this led to another great risk. Emerging market economies
simply borrowed too much, and foreigners lent and invested too much, without
much thinking and beyond sound limits. The financial sectors of these countries
were still primitive. Moreover, their governments were not monitoring
private-sector behavior properly. The domestic economy first enjoyed a strong
investment boom and an asset market bubble, especially in land, property and
stock markets. Then, the crash came. Suddenly, foreign investors and lenders
pulled out in droves and the macroeconomy and the domestic currency collapsed,
with the banking sector paralyzed. Enterprises were faced with bankruptcies and
people suffered unemployment. Multilateral and bilateral donors had to come to
the rescue after private investors left. This was the basic nature of the Asian
crisis 1997-98. [Analysis of the Asian crisis will continue in the following
lectures. This is only a preview.]
The other debt problem: PRSPs and HIPCs
However, there is another part of the debt crisis story that
continued beyond the 1980s. Some heavily indebted poor countries (HIPCs)--many
of them in Sub Saharan Africa--could not escape from the debt trap even with
repeated structural adjustment programs and debt rescheduling. Some of them
went to the Paris Club for debt relief several times, or more. They continued
to suffer from economic stagnation and heavy debt burden well into the 1990s.
It was clear that their problem was insolvency, that their economic
prospects were bleak with a huge debt overhang, and that a new approach had to
be taken to stimulate development.
In 1999 at the Koln (Cologne) Summit, the HIPCs Initiative was launched. It was proposed that official debt of heavily
indebted poor countries should be forgiven (including both multilateral and
bilateral official loans), and the money thus saved should be used for poverty
reduction.
At around the same time, World Bank President James Wolfensohn
initiated the new development approach called CDF (1998) and PRSP (1999) for
poor countries.
Comprehensive
Development Framework (CDF) is a general
philosophy and procedure under which development should take place. It
emphasizes comprehensiveness, namely both economic and non-economic
(i.e., social and institutional) aspects must be considered. Development must
proceed with ownership (autonomy) of the developing country
and partnership among all stakeholders in development. We may
safely say that CDF, as a general principle, is not very operational and its
political importance has already ended.
Poverty Reduction Strategy Paper (PRSP) is a document that spells out concrete measures and
timetable (usually three years) for poverty reduction for each poor country. The
allocation of tasks among various donors is also mapped out in a matrix form.
Originally, only HIPC countries were required to draft this document. But now.
all poor countries (i.e., all countries that receive IMF and World Bank loans
on concessional terms) must produce PRSP. [In East Asia, Vietnam was the first
country to draft a PRSP document, which was renamed the "Comprehensive
Poverty Reduction and Growth Strategy (CPRGS)." However, the Vietnamese
government decided not to do the second round of CPRGS; instead, its ideas were
included in the traditional Five-Year Plan for Socio-economic Development
2006-2010.]
As of April 2006, 18 countries have reached the completion
point (i.e., finished the three years of PRSP successfully). The July
2005 G8 Summit pledged full cancellation of debt owed to the International
Development Association (World Bank), the IMF and the African Development Fund
to countries that have reached the completion point of the Enhanced HIPC
Initiative. This proposal is called the Multilateral Debt Relief Initiative
(MDRI).
MDGs--key goals for poor countries?
Separately, the UN Millennium Summit (2000) adopted ambitious
social targets to be achieved by 2015, called the Millennium Development Goals
(MDGs, WB page, UNDP page), including halving the ratio of people in
absolute poverty between 1990 and 2015. To attain these goals, the World Bank's
PRSP is going to be used (hence the linkage between World Bank and UN
policies). The World Bank economists estimated that achieving MDGs would
require an additional $40-60 billion dollars of ODA per year (i.e., doubling
the current level of global ODA). The EU has promised to increase its ODA to
0.39% of GNP (amounting to about $7 billion) while the US has declared to add
$5 billion annually in the next three years for the benefit of poor countries
with "good practice." But Japan has cut its ODA budget drastically
due to fiscal crisis in recent years, and there is so far no sign that this
trend will end.
Other arguments in the current global development strategy include
the following:
--Some people (including
NGOs and social activists) say that ODA should be given in grants, not in loans
which worsens the debt burden problem.
--ODA should be given to poor countries only. Middle-income
countries should not receive official aid since they can attract private funds.
--ODA should be given
only to poor countries with "good governance" (this is called
the selectivity argument). If money is given to countries with
bad policies and institutions, it will be wasted. For these countries, advice,
not money, should be given.
--Aid coordination and harmonization: To reduce the transaction cost (too
many missions, reports, meetings, etc), aid programs must be coordinated among
all donors. A common fund should be created to which all donors contribute.
Sector strategies must be created and shared by all. We must avoid overlaps and
duplication, since money is fungible (any contribution by any
donor has the same effect [is it true?]).
However, the Japanese government has been uncomfortable with these
trends, which are mostly led by Europeans. It fears too much unification of
development ideas and implementation. Japan adheres to the best-mix
approach which says: since the needs of each country are different and
each donor has its comparative advantage, it is neither necessary nor desirable
to unify all aid programs and implementation. Unnecessary procedures must be
avoided, but a broad menu of alternative ideas and tools should be available to
developing countries. It is up to them, not donors, to decide which goals and methods
are to be adopted. Moreover, it is very risky to shift the financial management
of ODA money from donors to governments (especially local governments) which
are not very clean or transparent.
In summary, in the last several years, the international donor
community began to respond to the debt crisis of the poorest countries by a
combination of debt forgiveness and strengthened poverty reduction drive. In
fact, some donors now want to use ODA for poverty reduction only (not for
diplomacy, industrialization, infrastructure or competitiveness). However,
whether this strategy will really work in the long run remains to be seen.
Since 2002, the international organizations (especially the World Bank) has
started to re-emphasize the role of economic growth and infrastructure in the
process of poverty reduction. Some developing countries are tired of too much
emphasis on poverty reduction and too little effort in the direction of
competitiveness, industrialization and agricultural development. Clearly, this
is an evolving story the end of which is still unknown to us.
A
Continuing Legacy of Colonialism
The history of third world debt is the history of a
massive siphoning-off by international finance of the resources of the most
deprived peoples. This process is designed to perpetuate itself thanks to a
diabolical mechanism whereby debt replicates itself on an ever greater scale, a
cycle that can be broken only by canceling the debt. The developing countries’
debt is partly the result of the unjust transfer to them of the debts of the
colonizing States! A sum of US$ 59 billion external in public debt was imposed
on the newly independent States in 1960. With the additional strain of an
interest rate unilaterally set at 14 per cent, this debt increased rapidly.
Before they had even had time to organize their economies and get them up and
running, the new debtors were already saddled with a heavy burden of debt.
Odious
Debt
Odious debt is unfair debt resulting from illegitimate
loans. A useful summary from Jubilee USA:
Odious debt is an established legal principle.
Legally, odious debt is debt that resulted from loans to an illegitimate or dictatorial government that used the money to
oppress the people or for personal purposes. Moreover, in cases where
borrowed money was used in ways contrary to the people’s interest, with the
knowledge of the creditors, the creditors may be said to have committed a
hostile act against the people. They cannot legitimately expect repayment of
such debts.
Jubilee USA continues on to note that this principle
has been used by the US to prevent Spain imposing debts on Cuba in 1898, as the
US pointed out to Spain that those loans were imposed on Cuba by force, for
Spain’s interest. Great Britain was also denied similar claims against Costa
Rica in 1923).
Many poor countries today have started their
independent status with heavy debt burdens imposed by the former colonial
occupiers. South Africa as another example, has found it now has to pay for its
own past repression: the debts incurred during the apartheid era are now to be
repaid by the new South Africa.
But it is not just South Africa paying for this;
surrounding countries that have been destabilized from this are paying debts
incurred to deal with it. The organization
... After the Second World War, the United States
allowed Britain to repay debt at a very low rate so that it could rebuild. In
1953, the victorious allies met in London to cancel most of Germany's debt, so
that it could rebuild. Now the nations of Southern Africa want to rebuild a
post-apartheid society, but the creditors of today, are not willing to offer
them the space Britain received from the US and the Allies gave to Germany.
Instead they are demanding that the states of Southern Africa pay three to five
times the level that Britain or Germany paid after World War II.
Mismanaged
Lending
Further debt resulted from mismanaged spending and lending by
the West in the 1960s and 70s. As summarized from Jubilee 2000 (and
reposted here) :
- 1960s saw the US spend more than it
had, resulting in the printing of more dollars.
- Oil-producing countries, pegged to
the dollar were affected as the value of the dollar decreased.
- In 1973, the oil-producing countries
hiked their prices as a result, earning a lot of money, which they put in
to western banks.
- Interest rates started to plummet
resulting in more lending by banks to try and prevent a crisis.
- A lot of the borrowed money went to
western-backed dictators, resulting in little benefit for most people.
- In 1982 Mexico defaulted on its debt
payment, threatening the international credit system.
- The IMF and World Bank stepped in to
Mexico and other nations facing similar problems, prescribing their loans
and structural adjustment policies to ensure debt repayment.
- The poor
have suffered the most as a result of the harsh
conditions of structural adjustment.
Most loans to the third world have to be paid back in hard
currencies (which do not usually change too much in value, e.g. the Japanese
Yen, the American Dollar, etc.)
- Poor countries have soft currencies
(values which can fluctuate).
- Debt crises can also occur just by
the value of the developing country’s money going down, which can be due
to a variety of other inter-related factors.
- Paying off loans implies earning
foreign exchange in hard currencies.
- Combined with falling export prices
for many poor countries, debts become even harder to pay off.
- Refinancing loans implies taking on
new debts to service the old ones.
- Structural
adjustment advice in the past from the IMF and others,
has led to the cut back on important spending such as health, education,
in order to help repay loans. This has implied a downward spiral and
further poverty.
******Economists
often refer to a moral hazard of forgiving debts, because
it may encourage people to take on new loans and refuse to pay. Yet, to repay
odious debts is to encourage lending to pariah regimes. If banks could lend to
apartheid South Africa in the face of global opposition and global calls for
sanctions, and still collect on the loans, then the signal to international
banks is that they can lend to any regime, no matter how repugnant. There is
a moral hazard here: that we will encourage immoral lending.
The World’s Poor Are Subsidizing the Rich
Another cause for large scale debt has been the corruption and
embezzlement of money by the elite in developing countries (who were often
placed in power by the powerful countries themselves). These moneys are often
placed in foreign banks (and used to loan back to the developing countries).
Many loans also come with conditions, that include preferential exports etc. In
effect then, more money comes out of the developing countries than is given in.
This depresses wages even further due to the spiraling circle downwards to
ensure that enough exports are produced.
Backbone
to Globalization
The economic decisions and influence in various international
agreements, treaties and institutions by the wealthy and powerful nations also
help form the backbone of today’s globalization. That such immense wealth and
prosperity for some have come at a time when most nations in the world have
steeped into further poverty and debt is no coincidence. The policies of those
who have the power and influence have been successful to help raise standards
for some in their own nations, but at a terrible cost. Rich nations as well as
poor incur debts, but often the wealthier and more powerful ones are able to
use various means to avoid getting into the dilemmas and problems the poor
nations get into. In fact, the following summarizes it quite well using the
U.S. as an example:
The US began by abandoning the system of fixed exchange rates
established by the Bretton Woods Agreements in 1944 and introducing a system of
generalised floating exchange rates. There was a strong economic motive for the
decision, which the US authorities took unilaterally in 1973. They were seeking
to compensate for declining competitiveness and a growing national debt by
exporting the country’s macroeconomic imbalances. The floating exchange rate
system provided a flexible and efficient monetary tool that enabled them to
avoid the adjustments that would otherwise have been required by America’s new
situation as a debtor. In a system of fixed exchange rates and gold
convertibility, the US would have been obliged, like every third-world country
today, to pay for its indebtedness with a relative loss of sovereignty and
highly unpopular domestic austerity measures.
The new system also allowed the US to maintain a high standard
of living at home by dipping into the planet’s savings. Thanks to its political
power and to the dollar, which was the world’s only reserve currency, the US
was able to keep its monetary sovereignty intact. Its allies could not question
American policy without destabilising the institutional fabric and the cold-war
security system from which they derived undoubted benefits. The burgeoning US
deficit was funded for decades by Japan and Europe.
ORIGINS OF THE AFRICAN DEBT CRISIS
By MOSALA QEKISI
INTRODUCTION
Africa suffers from a very rare disease. It has the ailment that
the world medical experts have failed to cure, or have intentionally prescribed
a placebo so as Africa can find it impossible to manoeuvre out of its economic
quagmire. It is a pariah among the flourishing world, and it lacks common
ground in eliminating the endemic scourge that has afflicted it for decades.
While it is important to recognise the vista of light on the horizon, as
Africa’s economy is growing faster than any other continents’ now; it is also
with cautious treatment we wonder if that will be permanent or it will plunge
back to its debt ridden tendencies. The aim of this essay is to discuss the
origins of the African debt crisis.
EXTERNAL FACTORS
EXTERNAL INTERVENTION The
colonial legacy in Africa was perpetuated by the Berlin Conference in 1884, but
it is important to note that the European presence in Africa did not begin
during that time. The Colonial period was successful to Europe because it was
after the Industrial Revolution and they were able to command much military
prowess over non-Europeans. Besides few stories of mining exploits by Africans,
for example Mali and the Great Zimbabwe, largely the African minerals remained
untapped. Alemayehu (2003) observes that the colonial authorities encouraged
adventurer companies to ‘try to get something out of the region’. This was the
period of deep exploitation and the African economic system was systematically
destroyed through the creation of reserve labour to work in the late 19th
century Mining Revolution. In some countries like South Africa the
natives were deprived of their land and put in the Bantustans. By the end of
the colonial period, what had been achieved in Africa was the creation of a commodity
exporting economy, focusing on only primary products and virtual monopoly of
the African trade by Europe (ibid). As a result Africa had to borrow in order
to complement the few earnings from export because the finished goods from
Europe were more expensive than the primary products Africa sold. Some
countries during independence had to inherit the debt they never created but
which was made by colonial governments. Jones (2011) depicts that at independence
in 1980, Zimbabwe inherited US$700 million debt from the Rhodesian white regime
which was used to buy arms during the civil war. The debt was short-term and
high interest; imposing a large repayment burden. The Structural Adjustment
Policies (SAPS) were policies adopted by African countries in the1980’s and
1990’s in order to reduce the balance of payments deficit resulting from
declining commodity prices and terms of trade. They are described by FONDAD
(1992) to be politically difficult or administratively unworkable, because the prescriptions
do not result in the advertised cures. Despite claims that the state is
wasteful and inefficient, and that the private sector is more efficient and
produces quality products, the rapid privatisation proved calamitous since businesses
were transferred to less than capable entrepreneurs– as a result they
collapsed. The SAPs package included, inter alia , cuts in government spending, trade liberalisation, deregulation of
prices, devaluation of the exchange rate and removal of labour laws. Awareness
should be taken that such prescriptions were imposed in light of paying old
debts but not to focus on development. Even though the SAPs were meant to
address the level of debts, it did that at the expense of domestic poverty. In
Zimbabwe economic growth fell from averaging 4.5 per cent in the 1980s to 2.9
per cent between 1991 and 1997. Imports grew faster than exports, changing an
annual trade surplus between 1985 and 1990 to a trade deficit. Unemployment
increased from around22-30 per cent to 35-50 per cent (Jones, 2011). Due to
this countries had to, like a street beggar; ask for more loans, thus being
entangled in the debt trap.II.
WORLD SYSTEMIC CONTEXT
Suffice it to say that African debt was precipitated by
protectionism in the world's markets.
For agricultural products and
textiles, which, because of the stage of its development, Africa produced best.
Sandiford (2009) posits that as textiles industries progressed in developing countries,
General Agreement on Tariffs and Trade (GATT) allowed developed countries to apply
quotas on imports of textiles. GATT worked for the developed countries to the
extent that it made a formalized Multi-fibre Agreement (MFA) in 1974. This made
it difficult for African countries to diversify and increase exports to earn
foreign exchange, thus making it difficult for them to earn their way out of
the debt trap. After the first oil shock of 1973, many Third World countries
borrowed to ease their adjustment to the new fuel prices. Credit was easy to
obtain as Western banks sought for profitable uses of the OPEC surpluses which
were being entrusted to them, and the general world inflation of the period
meant that real interest rates were low (Nyerere, 1985). The 1979 oil shock
then hit with double force because it was followed almost immediately by
recession in the developed world, and by strict monetarist policies which were
intended to reduce the rate of inflation. As a result African countries
exhausted their foreign exchange holdings, and the steep rise in Western interest
rates and the higher costs of refinancing unpaid balances ballooned existing
debts. Very high interest rates
from the developed countries in the 1980s compounded to the amount
debt as the countries had to pay more interest than the original money they
borrowed. African countries borrowed more and more in order to pay high
interest rates. A result was a shortage of foreign exchange and the countries
were not able to buy crucial imports, thus a reduction in production. Nyerere
(1985) reveals that interest alone, which was due from all developing countries
in 1982, was about US $66 billion which was more than half of their combined
deficits. For example, Nigeria borrowed $11 billion and has so far paid back
$32 billion and it still owes $34 billion. That means every dollar borrowed has
been repaid almost three times over, yet about three times the initial amount
borrowed is still being owed (Kehinde & Awotundun, 2012). This brings to
mind the question; who benefits from foreign aid? Why do First World countries continue
disbursing Third World countries despite economic recessions in their
countries?
INTERNAL FACTORS
GOVERNMENT ROOTED CAUSES
Corruption was seen as one of the major causes of the debt crisis. During
Cold War, it never occurred to America to put democracy as a determinant for
foreign aid. For example, Mobutu Sese Seko of DR Congo was installed as a
neutralizing figure in the sub-Saharan Africa region. Mobutu seized foreign
businesses and shared them among his cronies and pilfered a lot of money (Powers,
2010). He was richer than his country and he boasted about being rich. Despite
that America continued to provide him with aid.
Furthermore, in international summits where African leaders pledge for aid,
poverty reduction is the name of the game; but in reality aid has been directed
not to areas of most need but of most political benefit. This is compounded by
donors who play the game and never challenge its practice. Consequently, a sort
of implicit conspiracy arises that remains hidden from public view, weakening
proper governance (Fowler, 2001). Skewed policies towards agriculture have also
contributed to Africa's current debt problem. It is a paradox on how there was
neglect in agriculture, yet it is considered as the backbone of most African
countries. Among the mineral rich countries, the decline was mainly
attributable to government policies that neglected agricultural productivity in
the vain hope that rising revenues from mineral exports would assure ample
income for consumer purchases abroad (Jackson,1985). Skewed policies can also
be linked to the urban bias thesis whereby state control depresses prices in
order to serve the interests of the dominant urban elites. This resulted in peasants
abandoning agriculture, leaving arable land fallow to seek for jobs in urban
areas.
Political instability spawned much of the ensuing debt crisis. After independence civil
wars, coups and military regimes were pervasive across the continent due to
dissatisfaction of the governments in power. During that warring period,
development projects were abandoned and in some countries it was impossible to
be engaged in agriculture, thus poverty and hunger was a mainstay. Jackson
(1985) reveals that weapons imports grew to the point
at which Africa (excluding Egypt) claimed 14.9 percent of world arms
imports in 1982, becoming second in the Third World only to the Middle East.
For example, violence exploded in Sudan in February1985, after President Gaafar
al-Nimeiri terminated government subsidies on fuel and food. The military
responded to the uprising by toppling the regime. When the coup took place,
Sudan owed the IMF almost $130 million in arrears, and the figure was expected
to reach $225 million by the end of 1985.
II. ECONOMIC ROOTED CAUSES
Irresponsible over-lending by private and official creditors
during the commodity boom of the1970s, without which irresponsible
over-borrowing by African governments could not possibly have occurred (FONDAD,
1992) also contributed to the African debt. Due to this willingness to loan
without any strings, African governments engaged in ambitious but useless
projects such as
relocation of a capital city as in Malawi, airports, stadiums
and big roads. Governments did not focus on poverty alleviation and
employment creation. For example, in 1984, Malawi experienced “institutional
destruction” under the burden of trying to manage 188 projects funded by 50
different agencies (Potts, 1985).
Import Substitution Industrialisation (ISI) is described by
(Alemayehu, 2002) as perhaps a major domestic policy problem. Admittedly, the
ISI strategy was a sound decision, but it was its conduct that precipitated
problems. Because of the historical context engineered by colonialism, which
deprived natives of quality education, there were less capable expertise; and
many of the projects were managed by less-than qualified persons. Agricultural
and industrial linkages were inharmonious due to the urban bias and the
agricultural sector had to buy expensive inputs but getting very little for
their produce. There was a small or no private sector, thus many wasteful practices
occurred. This produced a very corrupt state with senior state officials
gaining much in their pockets and engaging in much rent-seeking in the
provision of services.
A prolonged and devastating drought of 1981-84 severely impaired
the continent's agricultural and cash crop production and resulted in extensive
damage to output and to the financial structure of Africa's fragile economies
(FONDAD, 1992). This adversely affected many African countries, for they had to
use their foreign exchange reserves to buy food abroad. In 1984, 24sub-Saharan
were faced with hunger induced by drought.
CONCLUSION
The African debt crisis is the mastermind of the West in perceiving
Africans as brutish and pliable during the colonial period. This was
even perpetuated by authors such as Joseph Conradin perceiving the Congo
as “The Heart of Darkness”. Such subversion subordinated Africa to production
of primary products and textiles industry; this made Africa to be vulnerable to
the vicissitudes of the world economy. The post-colonial leaders amassed much
foreign aid, leaving the ordinary citizen living in penury. Much can also be
rendered to bad luck which stalked the continent in the form of oil crisis
and the drought
Any situation in which a country, usually a developing country, finds itself unable to
service its debts.
|
Debt/equity swap
|
An exchange of debt for equity, in which a lender is given
a share of ownership to replace a loan. Used as a method of resolving debt crises.
|
Debt forgiveness
|
Debt intolerance
|
In the context of the financial problems experienced
by developing countries and emerging economies, this refers to their inability to manage levels of
external debt that would be manageable for advanced countries. That is, their
credit ratings decline more rapidly with debt than would those of an advanced
country.
|
Debt overhang
|
A situation in which the external debt of a country is
larger than it will be able to repay. Often due to having borrowed in foreign
currency and then had its own currency depreciate.
|
Debt relief
|
Any arrangement intended to reduce the burden of debt on a country, usually
including forgiveness of part or all of what is owed to creditors, who may
include private banks and other entities, government, or international financial institutions.
|
Debt service
|
The payments made by a borrower on its debt, usually
including both interest payments and partial repayment of principal.
|
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