International Economic Relations

International Economic Relations
Introduction
International 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]. 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 ]. 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

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 of Global Economic Relations
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.

           Transnational/Multinational Corporations in the Global Economy
International corporations have several categories depending on the business structure, investment and product/ service offerings. Transnational companies (TNC) and multinational companies (MNC) are two of a these categories. Both MNC and TNC are enterprises that manage production or delivers services in more than one country. They are characterized as business entities that have their management headquarters in one country, known as the home country, and operate in several other countries, known as host countries. Industries like manufacturing, oil mining, agriculture, consulting, accounting, construction, legal, advertising, entertainment, banking, telecommunications and lodging are often run through TNC’s and MNC’s. The said corporations maintain various bases all over the world. Many of them are owned by a mixture of domestic and foreign stock holders. Most TNC’s and MNC’s are massive with budgets that outweigh smaller nations’ GDPs. Thus, TNC and MNC alike are highly influential to globalization, economic and environmental lobbying in most countries. Because of their influence, countries and regional political districts at times tender incentives to MNC and TNC in form of tax breaks, pledges of governmental assistance or improved infrastructure, political favors and lenient environmental and labor standards enforcement in order to be at an advantage from their competitors. Also due to their size, they can have a significant impact on government policy, primarily through the threat of market withdrawal. They are powerful enough to initiate lobbying that is directed at a variety of business concerns such as tariff structures, aiming to restrict competition of foreign industries. Some of the top TNC’s and MNC’s are General Electric, Toyota Motor, Total, Royal Dutch Shell, ExxonMobil and Vodafone Group
Moreover, a lot of people often interchange MNC and TNC or misconstrue them to be one and the same to pertain to a company that owns production facilities in two or more countries, with the only difference that the former being the original terminology. Contrary to this popular notion, they are of different kinds. TNC has been technically defined by United Nations Commission on Transnational Corporations and Investment as ‘enterprises which own or control production or service facilities outside the country in which they are based.” The committee has also placed its preference on the term TNC. MNC, on the other hand, is the older term and popularly remains to be the generic label for firms similar to TNC and MNC. Here’s the significant difference, though. Multinational companies (MNC) have investment in other countries, but do not have coordinated product offerings in each country. They are more focused on adapting their products and service to each individual local market. Well-known MNC’s are mostly consumer goods manufacturers and quick-service restaurants like Unilever, Proctor & Gamble, Mc Donald’s and Seven-Eleven. On another note, Transnational companies (TNC) are much more complex firms. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market. Most of them come from petroleum, I.T. consulting, pharmaceutical industries among others. Examples are Shell, Accenture, Deloitte, Glaxo-Smith Klein, and Roche.

Summary
1) Multinational (MNC) and Transnational (TNC) companies are types of international corporations. Both maintain management headquarters in one country, known as the home country, and operate in several other countries, known as host countries.
2) Most TNC’s and MNC’s are massive in terms of budget and are highly influential to globalization. They are also considered as main drivers of the local economy, government policies, environmental and political lobbying
3) An MNC have investment in other countries, but do not have coordinated product offerings in each country. It is more focused on adapting their products and service to each individual local market. A TNC, on the other hand, have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.

Read more: Difference Between TNC and MNC | Difference Between http://www.differencebetween.net/business/difference-between-tnc-and-mnc/#ixzz4yPrkKo6e
A multinational corporation or worldwide enterprise is a corporate organization that owns or controls production of goods or services in two or more countries other than their home country.
Transnational corporations (TNCs) are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain equity capital stake.
Please note that MNC has an international identity as belonging to a particular home country where they are headquartered. A transnational company is borderless, as it does not consider any particular country as its base, home or headquarters. Transnational corporations are a type of multinational corporations.
Multinational corporations sit at the intersection of production, international trade, and cross-border investment.  A multinational corporation is “an enterprise that engages in foreign direct investment (FDI) and owns or controls value adding activities in more than one country” (Dunning 1993, 3).  MNCs thus have two characteristics.  First, they coordinate economic production among a number of different enterprises and internalize this coordination problem within a single firm structure.  Second, a significant portion of the economic transactions connected with this coordinated activity take place across national borders.  These two attributes distinguish MNCs from other firms. While many firms control and coordinate the production of multiple enterprises, and while many other firms engage in economic transactions across borders, MNCs are the only firms that coordinate and internalize economic activity across national borders.
It is difficult to exaggerate the importance of MNCs in the contemporary global economy.  In discussing MNCs it is typical to distinguish between parent firms, the corporate owner of the network of firms comprising the MNC, and the foreign affiliates, the multiple enterprises owned by parent firms.  This basic terminology allows us to gain a sense of the role that MNCs play in the contemporary international economy.  According to the United Nations Conference on Trade and Development, there are approximately 63,459 parent firms that together own a total of 689,520 foreign affiliates.  In 1998 these affiliates employed approximately 6 million people worldwide.  Together, parent firms and their foreign affiliates produce about 25 percent of world gross domestic product (UNCTAD 2000).  The importance of multinational corporations is not limited to production, as they are also significant participants in international trade.  It has been estimated that trade within MNCs, called intra-firm trade, accounts for about one-third of total world trade.  If we add to this figure the trade that takes place between MNCs and other unaffiliated firms, then MNCs are involved in about two-thirds of world trade.  Thus, MNCs are productive enterprises that by definition engage in cross-border investment and are heavily involved in international trade. Who are these firms, and where are they located?  While it is impossible to provide an extensive catalog of more than 60,000 firms, table 5.2 does list the world’s 100 largest MNCs, ranked by their foreign assets.  These 100 MNCs, among which are many familiar names, account for more than 15 percent of all foreign assets controlled by all MNCs, and for 22 percent of total sales by MNCs.  These large MNCs are based almost exclusively in advanced industrialized countries; ninety-nine of the 100 largest firms are from the United States, Western Europe, or Japan and more than 5/6ths of all parent corporations are based in advanced industrial countries (see table 5.3).  Parent corporations are not exclusively a developed country phenomenon, however.  Hong Kong, China, South Korea, Venezuela, Mexico, and Brazil are also home to MNC parent firms, but these firms are considerably smaller than developed country firms.  Only one MNC parent based in a developing country, Petroleos de Venezuela, ranks among the world’s 100 largest.  The fifty largest MNCs from developing countries control only $105 billion of foreign assets, less than ten percent of the assets controlled by the 50 largest developed country MNCs. The distribution is reversed when we consider the affiliates.  Developing countries host more than 355,324 MNC affiliates, while advanced industrialized countries host only 94,269 (UNCTAD 2000, 11-13).  Within the developing world, MNC affiliates are
  Table 5.2:  The Fifty Largest MNCs, Ranked by Foreign Assets

Firm Country Industry Foreign Total Foreign
Assets Assets Employment
General Electric United States Electronics 97.4 304.0 111,000
Ford Motor Company United States Automotive 72.5 275.4 174,105
Royal Dutch Shell Netherlands/UK Petroleum 70 115 65,000
General Motors United States Automotive
Exxon Corp United States Petroleum 54.6 96.1
Toyota Japan Automotive 41.8 105.0
IBM United States Computer 39.9 81.5 134,815
Volkswagen Group Germany Automotive 57.0 133,906
Nestle S.A. Switzerland Food and Beverages 31.6 47.6 219,442
Daimler-Benz Germany Automotive 30.9 76.2 74,802
Mobil United States   Petroleum 30.4 43.6 22,200
Fiat Spa Italy Automotive 30 69.1 94,877
Hoechst AG Germany Chemicals 29.0 34.0
Asea Brown Boveri (ABB) Switzerland Electrical Equipment 29.8 200,574
Bayer AG Germany Chemicals 30.3
Elf Aquitaine SA France Petroleum 26.7 42.0 40,500
Nissan Motor Japan Automotive 26.5 57.6
Unilever Netherlands/Uk Food and Bev 25.6 30.8 262,840
Siemens AG Germany Electronics 25.6 67.1 201,141
Roche Holding AG Switzerland Pharmaceuticals 37.6 41,832
Sony Corp Japan Electronics 48.2
Mitsubishi Japan Diversified 21.9 67.1
Seagram Canada Beverages 21.8 22.2
Honda Motor Japan Automotive 21.5 36.5
BMW AG Germany Automotive 20.3 31.8 52,149
Alcatel France Electronics 20.3 41.9
Philips Electronics Netherlands Electronics 20.1 25.5 206,236

News Corp Australia Media 20.0 30.7
Phillip Morris United States   Food/Tobacco 19.4 55.9
British Petroleum UK Petroleum 19.2 32.6 37,600
Hewlett-Packard United States   Electronics 18.5 31.7
Total SA France Petrloeum 25.2
Renault SA France Automotive 18.3 34.9 45,860
Cable and Wireless Plc UK Telecommunication 21.6 33,740
Mitsui &Co. Ltd Japan Diversified 17.9 55.5
Rhone-Poulenc SA France Chemicals/Pharmaceuticals 17.8 27.5
Viag SA Germany Diversified 17.4 32.7
BASF AG Germany   Chemicals 26.8
Itochu Corp Japan Trading 16.7 56.8 2,600
Nassho Iwei Corp Japan Trading 16.6 40.4 2,068
Du Pont United States Chemicals 16.6 42.7
Diageo Plc UK Beverages 29.7 63,761
Novartis Switzerland Pharmaceuticals/Chemicals 16.0 36.7 71,403
Sumitomo Corp Japan Trading/machinery 15.4 43.0
ENI Group Italy Petroleum 14.6 49.4 23,239
Chevron Corp United States   Petroleum 14.3 35.5 8,610
Dow Chemical United States Chemicals 14.3 23.6
Texaco Inc United States   Petroleum 14.1 29.6
BCE Inc Canada Telecommunication 13.6 28.2
Xerox United States   Photo Equipment 13.5 27.7

Source:  United Nations Conference on Trade and Development, 1999.

Table 5.3: Parent Corporations and Affiliates By Region
  Parent Corporations Foreign Affiliates
Based in Economy Located in Economy
Developed Economies
     Western Europe 37,580 61,594
     United States 3,387 19,103
     Japan 4,334 3,321
Developing Economies
     Africa 167 3,669
     Latin America and Caribbean 2,019 24,345
     Asia 9,883 327,310
     Central and Eastern Europe 2,150 239,927
Source: UNCTAD 2000, 11-13.

highly concentrated in a relatively small set of countries.  Thirteen countries in East Asia and Latin America host 331,748 MNC affiliates, about half of the total affiliates worldwide.  China alone hosts 235,681 affiliates.  MNCs have also invested heavily in Eastern and Central Europe during the 1990s, creating a total of 239,927 affiliates in this region.  Here too affiliates are concentrated in a few countries; the Czech Republic, Hungary, and Poland host 135,997 of the affiliates active in this region.  While these figures on the location of affiliates are interesting, they are misleading to some extent.  As we saw in chapter four, the vast majority of foreign direct investment flows into advanced industrialized countries rather than the developing world.  Thus, even though there are more affiliates based in developing countries than in advanced industrialized countries, the affiliates created in advanced industrialized countries tend to be larger and more capital intensive than the affiliates created in developing countries.
For what specific purposes do firms engage in foreign direct investment? MNC investment can be divided into three broad categories.  First, MNCs engage in crossborder investment to gain secure access to supplies of natural resources.  For example, the American copper mining firm Anaconda made large direct investments in mining operations in Chile in order to secure copper supplies for production done in the United States.  Indeed, as table 5.4 illustrates, petroleum and mining is the third most important industry represented in the top 100 MNCs, with 11 of the largest firms engaged in either oil production or mining.
Second, MNCs invest across borders to gain access to foreign markets.  Much of the cross-border investment in auto production undertaken within the advanced industrialized world fits into this category.  During the 1980s and early 1990s, Japanese
Table 5.4: Industry Composition of the Top 100 MNCs
  1990 1998
Electronics/electrical equipment/computers 14 17
Motor Vehicle and Parts 13 14
Petroleum (exploration, refining, distribution) and Mining 13 11
Food, Beverages, Tobacco 9 10
Chemicals 12 8
Pharmaceuticals 6 8
Diversified 2 6
Telecommunications 2 6
Trading 7 4
Retailing - 3
Utilities - 3
Metals 6 2
Media 2 2
Construction 4 1
Machinery/engineering 3 -
Other 7 5
Total 100 100
Source: UNCTAD 2000, 78.

and German automotive MNCs such as Toyota, Nissan, Honda, BMW, and Mercedes
built production facilities in the United States in response to concerns that barriers to market access would limit the number of cars they would be allowed to export into the American economy from Japanese and German plants.  During the 1960s, many American MNCs made direct investments in the European Union to gain access to the common market being created there.  As table 5.4 indicates, the auto industry is the second most heavily represented industry among the largest MNCs, accounting for 14 of the top 100 MNCs.
Third, MNCs make cross-border investments to improve the efficiency of their operations, by rationalizing production and trying to exploit economies of specialization and scope.  An increasingly large share of cross-border investment in manufacturing fits into this category.  In electronics and computers as well as in the auto industry, firms allocate different elements of the production process to different parts of the world.  In computers, electronics, and electrical equipment, for example, which account for seventeen of the largest 100 MNCs (see table 5.4), the human and physical capital intensive stages of production such as design and chip fabrication, are performed in the advanced industrialized countries, while the more labor-intensive assembly stages of production are performed in developing countries.  In the auto industry, the capital intensive design and production of individual parts such as body panels, engines, and transmissions is performed in developed countries, and the more labor-intensive assembly of the individual components into automobiles is performed in developing countries.
Multinational corporations’ activities in the postwar international economy have evolved over time.  It is common to divide this evolution into two distinct periods, the immediate postwar period spanning the years 1945 to 1960 and a second period since 1960.  Two features characterized the immediate postwar period.  First, American firms dominated foreign direct investment.  Concerned with postwar reconstruction and unwilling to risk the balance of payments consequences of capital outflows, European and Japanese governments had little interest in encouraging outward direct investment.  As a consequence, American firms dominated MNC activity, accounting for about two thirds of the new affiliates created in this period.  Second, the bulk of MNC investment during this period was oriented toward Europe for the purpose of manufacturing.  The push to invest in Europe was given additional impetus at the end of the 1950s by the creation of the European Economic Community, and thus the early 1960s saw a rapid increase in the amount of market-oriented investment by American firms in the Common
Market countries.  Other direct investments flowed to developing countries, Canada, and Australia for natural resource extraction.  In short, American MNCs engaged primarily in market- and natural resource-oriented foreign direct investment dominated the immediate postwar period.
Both of these characteristics of MNC activity have changed dramatically since 1960.  The early dominance of American firms has been increasingly diminished as European and Japanese firms began to engage in foreign direct investment.  The increased role of other industrialized nations has more recently been accompanied by the emergence of foreign direct investment by MNCs based in the Asian NICs and in Latin America.  Thus, while American firms continue to play a large role, they are not nearly as dominant today as they were in the early postwar years.  At the same time, the relative importance of market- and natural resource-oriented direct investment has fallen and that of efficiency-oriented investment has risen.  As Dunning (1996) notes, MNCs increasingly view “each of their foreign affiliates and, frequently, their associated suppliers and industrial customers, not as self-contained entities, but as part of a regional or global network of activities.  New investments are increasingly undertaken as part of an integrated international production system.” The shift to efficiency-oriented investments and integrated international production systems has been made possible in large part by developments in communications technology and, as we saw in chapter four, by the reduction in trade barriers achieved through the GATT process. In summary, during the last fifty years multinational corporations have grown to play a centrally important role in the international economy.  MNCs are, in many respects, the driving force behind the deepening integration of the global economy.  The central importance of MNCs in the contemporary international economy raises a large number of issues that we explore in the pages that follow.  Most of these issues can be subsumed under a single question:  What are the economic and political consequences of MNC activity?  To answer this question we look first at the economics of multinational corporations, examining why firms engage in foreign direct investment and how FDI affects economic activity in the countries that host it.  We then turn our attention to the political economy of MNCs, examining the nature of the bargaining relationship between MNCs and host-country governments and governments’ efforts, unsuccessful to date, to craft an international investment regime.
 The Costs and Benefits of MNC Activity
How are host countries affected by MNC activity? While it is clear that MNCs are motivated to engage in foreign direct investment to raise their profitability, it is less obvious what impact these investments have on the countries that receive them.  In fact, most of the controversy surrounding MNC activity arises from disputes over how foreign direct investment affects the host country.  Some argue that FDI is highly beneficial to the host country, while others argue that MNCs have a negative impact on host countries, particularly in the developing world.  Here we look closely at two well-developed perspectives on the impact of foreign direct investment on host countries and then briefly consider what the existing empirical evidence suggests about the accuracy of these competing perspectives.
The Benign model argues that MNCs make a significant contribution to economic development.  Foreign direct investment is an important mechanism through which savings are transferred from the advanced industrialized world to the developing world.  Because developing countries usually have low savings, FDI can usefully add to the capital available for physical investment.  Moreover, because MNCs create fixed investments, this form of cross-border capital flow is not subject to the problems often posed by financial capital flows.  Fixed investment is substantially less volatile than financial capital flows, and thus does not generate the kinds of boom and bust cycles we saw in chapter 8.  In addition, because MNCs invest by creating domestic affiliates, direct investment does not raise host countries’ external indebtedness.  Of the many possible ways in which savings can be transferred to the developing world, therefore, direct investment might be the most stable and least burdensome for the recipient countries.
The benign model also suggests that MNCs are important vehicles for the transfer of technology to host countries.  Because MNCs control proprietary assets, which are often based on specialized knowledge, the investments they make in developing countries often lead to this knowledge being transferred to indigenous firms.  In Malaysia, for example, Motorola Malaysia transferred the technology required to produce a particular type of printed circuit board to a Malaysian firm, which then developed the capacity to produce these circuit boards on its own (Moran 1999, 77-8).  In the absence of the technology transfer, the indigenous firm would not have been able to produce these products.  Technology transfer can in turn generate significant positive externalities with wider implications for development (see Graham 1996, 123-130).  Externalities arise when economic actors in the host country that are not directly involved in the MNC-local affiliate technology transfer also gain from this transaction.  If the Malaysian Motorola affiliate, for example, was able to use the technology it acquired from Motorola to produce inputs for other Malaysian firms at a lower cost than these inputs were available elsewhere, then the technology transfer would have a positive externality on the Malaysian economy.
In addition to transferring technology, the benign model suggests that MNCs transfer managerial expertise to developing countries.  Greater experience at managing large firms allows MNC personnel to organize production and coordinate the activities of multiple enterprises more efficiently than host country managers.  This knowledge is applied to the host country affiliates, allowing them to operate more efficiently as well.  Indigenous managers in these affiliates can then move to indigenous firms, spreading managerial expertise into the host country.
Finally, the benign model suggests that MNCs enable developing country producers to gain access to marketing networks.  When direct investments are made as part of a global production strategy, the local affiliates of the MNC and the domestic firms that supply the MNC affiliate become integrated into a global marketing chain.
This opens up export opportunities that indigenous producers would not otherwise have.  The Malaysian firm to which Motorola transferred the printed circuit board technology, for example, wound up supplying not only Motorola Malaysia, but also began to supply these components to eleven Motorola plants worldwide.  These opportunities would not have arisen had the firm not been able to link up with Motorola Malaysia.
The Malign model focuses on many of the same elements as the benign model, but argues that these factors often operate to the detriment of host country economic development.  First, rather than transferring savings to developing countries, the malign model argues that MNCs reduce domestic savings.  Savings are reduced in two ways.  First, it is argued that MNCs often borrow on the host country capital market rather than bring capital from their home country.  MNC investment therefore “crowds out” rather than adding to domestic investment.  Second, it is suggested that MNCs earn rents— above normal profits—on their products and repatriate most of these earnings.  Host country consumers therefore pay too much for the goods they buy, with negative consequences on individual savings, while MNC profits, which could potentially be a source of savings and investment in the host country, are transferred back to the home country.  The amount of domestic savings available to finance projects therefore falls.
The malign model also argues that MNCs exert tight control over technology and managerial positions, preventing the transfer of both.  The logic here is simple.  As we saw above, one of the principal reasons for MNC investment arises from the desire to maintain control over proprietary assets.  Given this, it is indeed hard to understand why an MNC would make a large fixed investment in order to retain control over proprietary technology, and then once having done so begin to transfer this technology to host country firms.  Managerial expertise is not readily transferred either, in large part because MNCs are reluctant to hire host-country residents into top-level managerial positions.  Thus, the second purported benefit of MNC—the transfer of technology and managerial expertise—can be stymied by the very logic that causes MNCs to undertake FDI.
Finally, the malign model suggests that MNCs can drive domestic producers out of business.  This can happen in one of two ways.  On the one hand, domestic firms producing in the same sector will face increased competition once an MNC begins selling in the domestic market.  Using best practices for management and state of the art technology, MNCs can often under-price local firms, thereby driving them out of business.  Second, MNCs often desire to assemble their finished goods from imported components.  As a result, domestic input producers in the same industry will find that as the domestic producers they supply are driven out of business, they have no one to sell their intermediate goods.  Thus, local input suppliers can also be driven out of business by MNCs.
The benign and the malign models depict dramatically different consequences from MNC/TNC investment in developing country economies.  Which of these two models is correct?  The short answer is that both are; foreign direct investment is sometimes beneficial for and at other times detrimental to the host countries.  Two studies, now somewhat outdated, are suggestive in this regard.  One study examined 88 MNC affiliates operating in six countries (Lall and Streeten 1977).  The authors found that in two-thirds of the cases foreign direct investment had a positive impact on the host country, and in one-third of the cases the impact was negative.  A similar study was conducted about ten years later.  Focusing on 50 foreign direct investments, this study found that between half and three quarters of the foreign investments yielded net benefits to the host countries, while one-quarter to one-half of the projects imposed net costs onto the host country (Encarnation and Wells 1986).  Thus, foreign direct investment sometimes operates in the manner suggested by the benign model, and at other times it operates as the malign model suggests.
What determines whether any particular investment will be beneficial or detrimental to the host country?  It is extremely difficult to say anything systematic or conclusive in response to this question.  A range of considerations are important, including the specific agreement between the host-country government and the MNC upon which the investment is based.  While any broad generalizations must therefore be treated with considerable caution, one can suggest that some types of investment begin with a bias against host country development while other types of investment do not carry an initial bias.  Market oriented and natural resource investments both carry biases that can limit the contribution they make to economic development in host countries.  First, both types of investment take place under conditions of limited competition.  Foreign affiliates in the extractive industries often gain monopoly control over the resource deposits of a given country, for example, while affiliates producing for the host-country market are often protected from external competition by high tariffs.  The absence of competition results in large rents accruing to firms operating in these areas, with associated efficiency losses for the host country.  Moreover, both types of investment can have a negative impact on domestic producers in the host country.  UNCTAD suggests, for example, that recent investments by MNCs in copper mining in Chile may have substituted for investments that otherwise would have been made by the Chilean national copper company (CODELCO), “which is the largest copper mining enterprise in the world and operates with state-of-the-art technology” (UNCTAD 1999, 173).  Finally, neither resource oriented nor market oriented investment offers many opportunities for domestic producers to link into international marketing networks.  For all of these reasons we might expect host countries to be most likely to suffer costs from natural resource and market-oriented investments.
Efficiency-oriented investments seem to carry fewer of the biases and offer the greatest chance that MNC activity will have a positive impact on host countries.  The industries in which these investments occur are usually quite competitive internationally, hence the MNC’s drive for cost reduction measures, and the level of rents is correspondingly lower.  Such investments can (but don’t always) create backward linkages to domestic input producers, and thus can promote rather than retard local firm growth.  In particular, efficiency-oriented investments often “crowd-in” rather than “crowd out” investments by domestic firms.  For example, it has been estimated that Intel’s decision to construct a microprocessor plant in Costa Rica will likely give rise to additional investments by 40 Costa Rican firms (UNCTAD 1999, 172).  Finally, the international orientation of such firms creates opportunities for local firms to link themselves to global marketing networks.  The research reported by Encarnation and Wells (1986) is consistent with the notion that efficiency-oriented investments contain fewer of the biases against development that are present in natural resource and market oriented investments.  All of the export-oriented projects in the sample of MNC affiliates that they examined provided benefits to the host country.  For all of these reasons we might expect host countries to benefit the most from efficiency-oriented investments.
The case of Singer Sewing Machines experience in Taiwan is suggestive of the potential benefits available through well-managed foreign direct investment.  Singer first began producing in Taiwan in 1964.   At the time there were a number of local sewing machine producers using old technology and lacking standardization and therefore unable to compete in international markets.  As a condition of Singer’s investment, the Taiwanese government imposed domestic content requirements, insisting that Singer source 83 percent of its parts from Taiwanese producers within one year.  In addition, the Taiwanese government imposed substantial conditions to ensure technology transfers.  Singer was required to provide the local parts producers with standardized blueprints, and make available technical experts to assist in local firms’ efforts to produce the specified parts.  In addition, Singer was obliged to allow Taiwanese sewing machine producers to use the same parts it sourced from local parts producers at a cost close to the world price for these parts.  Finally, an export requirement was imposed; Singer was required to increase its exports from Taiwan rapidly.
Singer complied with all of these requirements.  Technical and management experts were dispatched to train local parts producers and to reorganize the production system within Taiwan.  Technical assistance was also provided to local sewing machine producers—the very firms that comprised Singer’s competition—at no cost to these firms.  Blueprints and part specifications were provided to all local parts producers, thereby allowing them to work to common specifications and standards.  Finally, Singer held classes for local parts producers in the technical and managerial aspects of the business.
As a direct result of these measures, substantial transfers of technology occurred, and significant backward linkages between the final sewing machine producers and the parts suppliers occurred.  By the late 1960s Singer was sourcing all of the parts for its sewing machines produced in Taiwan from Taiwanese firms (except the needles).  Moreover, 86 percent of Singer’s local production was exported.  In addition, Taiwanese sewing machine producers became more competitive internationally.  As local parts became standardized and of greater quality, Taiwanese sewing machine producers also became able to export to foreign markets.
In summary, MNC/TNC activity is sometimes beneficial for host country economic development, and at other times is detrimental to such development.  One might suggest that natural resource investments are the least likely to offer substantial benefits to host countries, while efficiency oriented investments are the most likely to offer substantial benefits to host countries.  Market oriented investments are likely to fall somewhere in between these two types, sometimes offering benefits, and at other times imposing costs.  It is important to re-emphasize the tentativeness of these broad generalizations.  The point must be made that MNC/TNC activity has historically been subject to political considerations.  As a consequence, the impact of any particular investment on any particular host country is shaped by the particular agreement between the firm and the host country government.  These agreements can transform a natural resource investment into a highly beneficial proposition for a host country, and they can transform an efficiency-oriented investment into a highly costly one.  In other words, while the preceding discussion is suggestive, the effect that any particular foreign direct investment will have on any particular host country will depend greatly on the specific details of the case.




Debt Crisis
Debt crisis is the general term for a proliferation of massive public debt relative to tax revenues, especially in reference to Latin American countries during the 1980s, the United States and the European Union since the mid-2000s, and the Chinese debt crises of 2015.
The 1980s and the 1990s
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 overborrowed, and foreign banks and private investors overlent. 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)
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).
A similar situation can occur with the concept of sustainability of the balance of payments. When a developing country is accumulating foreign debt (whether ODA or commercial), how can we tell whether it will repay the debt in the future? It depends on many factors: (i) whether industrialization succeeds; (ii) whether political stability is maintained; (iii) whether the global business condition is favorable; (iv) whether export and import prices rise or fall; (v) whether world interest rates rise or fall; (vi) whether regional crisis, war, terrorism, etc. occurs, ... We can calculate the balance-of-payments viability with a simple model with rigorous assumptions. But for practical purposes, sustainability is highly uncertain. For example, there is no easy way to predict whether or not a country succeeds in development in the long run.
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 discussed elsewhere, a 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).

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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)

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)
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-à-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).

Africa and the debt burden
The literature about the origin of the African debt crisis lists a number of factors as its causes. The oil price shocks of 1973-74 and 1978-79, the expansion of the Eurodollar, a rise in public expenditure by African governments following rising commodity prices in the early 1970s, the recession in industrial countries and the subsequent commodity price fall, and a rise in real world interest rate are usually mentioned as major factors. Surprisingly, almost all the literature starts its analysis either in the early 1970s or, at best, after independence in the 1960s. The conclusion that emerges from such analysis is that the African debt problem is essentially a trade problem. Notwithstanding the highly publicised debt relief initiative, the Highly Indebted Poor Countries (HIPC), the African debt problem is one among a myriad of problems the continent is facing. A number of studies, in particular on Latin American countries’ debt (See among others, Streeten 1972; Kraft 1984; Cline 1984; Vos 1994) have attempted to explain the origin of the debt crisis. This literature attributes the developing countries’ debt (including that of Africa) to shocks generated in the early 1970s.

THE AFRICAN ECONOMIC CRISIS AND AFRICAN DEBT 2.1 The Policy Dialogue about Africa’s Economic Crisis1 Three contending explanations are given for Africa’s economic crisis: the World Bank view which begins with what is known as ‘the Berg Report’ (World Bank 1981, 1989, 1994), the African Alternative Framework to Structural Adjustment Programs (ECA 1989a) and a view held by academics with Marxist orientation (see inter alia Lawrence 1986; Sutcliffe 1986). The World Bank publications cited above basically argue that, notwithstanding the problems associated with external shocks and population pressure, the main reason for African economic crisis lies on government policy failure. The Bank continues to argue (see World Bank 1994) that orthodox macroeconomic management represents the road to economic recovery in Africa and, hence, that more adjustment, not less, is required. A number of other analysts have arrived at similar conclusions, in line with those of the Bank (see van Arkadie 1986; Grier and Tullock 1989; Elbadawi, Ghura and Uwujaren 1992; White 1996b; Ghura 1993; Collier and Gunning 1999). This assertion of the ‘policy school’ has been the subject of various criticisms coming from a host of different angles (see inter alia Adam 1995; Mosley, Subasat and Weeks 1995; Lall 1995).2 In contrast, the ECA (1989a) prefers to explain Africa’s problems in terms of deficiencies in basic economic and social infrastructure (especially physical capital), research capability, technological know-how and human resource development, compounded by problems of socio-political organization. Thus, the ECA argues that the ‘policy school’ type of analysis and its proposed solution – Structural Adjustment programs, SAPs – is not only the wrong diagnosis but also the wrong treatment. The ECA document notes ‘...both on theoretical and empirical grounds, the conventional SAPs are inadequate in addressing the real causes of economic, financial and social problems facing African countries that are of a structural nature’ (ECA 1989a, 25). Just as many have argued in favour of the Bank/IMF view, so too have many analysts come out in support of the ECA’s line of reasoning (Ngwenya and Bugembe 1987; Fantu 1992; Adedeji 1993; Stefanski 1990; Ali 1984; Wheeler 1984; Stein 1977). The third view differs from the other two and is critical of both. For these analysts the African problems emanate from its economic dependence (Lawrence 1986, 2; Sutcliffe 1986). Thus, according to these viewpoints, Africa’s problems are best understood as resulting from long-term underdevelopment, following dependency theory3 , and short-term vulnerability, following international aspects of crisis theory (Amin 1974a, 1974b; Ofuatey-Kadjoe 1991; Sutcliffe 1986; Harris 1986; Onimode 1988; Moyo and Amin 1992; Mamdani 1994). While there are areas where the first two approaches both converge and diverge, the third explanation for Africa’s economic crisis stands firmly in opposition to both. The core of the disagreement between the bank and ECA views centres on ‘the role of the market’ mechanism4 (Oskawe, quoted in Asante 1991, 179). While the Bank believes in the market mechanism as representing the fundamental instrument of resource allocation and income distribution, the ECA questions this viewpoint. However, these institutions do agree on some major issues, such as the need for human resource development, improving the efficiency of parastatals, and sound debt management (Alemayehu 2002b). Thus, it is within this general context that the African external problems in general and its debt problem in particular need to be understood.
The African Debt Problem One of the major external problems of African countries is the external finance problem in general and the debt crisis in particular. As can be seen from tables 1 and 2, the total external debt of Africa (and Sub-Saharan Africa) grew nearly 17 (and 20) fold, from its relatively low level of US $16.3 (and 11) billion in 1970 to nearly US $280 (and 223) billion today. The most important component of this foreign burden is outstanding longterm debt. The use of IMF credit became important in the late 1970s and early 1980s when structural adjustment and enhanced structural adjustment facilities became important components of flows to Africa. Although the share of African debt in the total debt of developing countries is very low (Sub-Saharan Africa’s share is about 9 percent between 1995 and 2000), its relative burden is very high. Another dimension of the structure of African debt is the changing pattern of its creditors. Based on table 1, bilateral debt is the most important component of the total African debt. This is followed by multilateral debt. About a quarter of the Sub-Saharan Africa debt is owed to multilateral debtors. The bilateral and private debtors account for 35 and 14.4 percents, respectively. Private inflows are showing a declining trend (see table 1). A final observation is that a larger share of the official debt is on concessional terms. It is also interesting to note that the debt problem is aggravated by capitalisation of interest and principal arrears, which constitute nearly a quarter of the external debt (Alemayehu 2000a). In fact, the net transfer from Sub-Saharan Africa (to the developed world) between 1995-2000 was about US $3 billion, the corresponding figure for all developing countries being about US $23 billion (see table 1).







Table 2 shows the composition of debt across regions in Africa. Some important patterns do emerge from these figures. First, the debt stock is equally shared across the three regions in Africa – this shows that the North Africa region has the highest debt stock per country. Second, private debt creating flows are important in North Africa than in the other regions. This is in line with the literature which shows that private capital flows are positively associated with the level of development (Alemayehu 2002b). Finally, net transfer to Africa is negative and has a rising trend (the average annual figure being US $-0.3, -4.9 and -6.7 billions in 1985-89, 1990-94 and 1995-99, respectively). Among the regions, North Africa (which has a negative value even in aggregate transfer) is the worst hit, followed by the West & Central Africa and East & Southern Africa regions. The burden of debt on meagre resources can be read from such negative net transfers to the sub-regions.


THE HISTORICAL ORIGIN OF AFRICA’S DEBT CRISIS Pre-colonial African economic interactions with the rest of the world, and especially Europe, date back many centuries, before culminating in fullyfledged colonisation in the latter part of the nineteenth century.7 This was particularly true in WCA. During the first part of this period, Africa had autonomy in its linkages with the rest of the world and did produce processed goods.8 It is also worth noting that the quality of many of these processed goods was quite comparable with products originating in other parts of the world. Moreover, none of the goods brought by Europeans supplied any of the basic or unfulfilled needs of African societies. However, this autonomy in traditional industries was undermined by subsequent events (Amin 1972, 107-110, 117; Hopkins 1973, 87; Rodney 1972; Hopkins 1973, 51-86; Neumark 1977, 128-130; Vansina 1977, 237-248; Austen 1987, 48; Konczacki 1990, 24). The early development pattern of Africa varies between regions, however. In contrast to West Africa, East and Southern Africa (ESA) were characterised by a well-established economic interaction with the Arabian and Asian countries long before the arrival of the Europeans. More specifically, this part of Africa supplied a range of products, such as gold, copper, grain, millet, and coconut to the Middle East and Indian Ocean economies. There also existed a dynamic caravan trade and commercial plantations long before the onset of European colonial rule. Thus, one may reasonably conclude that although its economy was not as complex as that of West Africa, the ESA region had some degree of autonomy in its economic activity, and, hence, was not as dependent on the export of commodities, particularly to Europe. In general, there would appear to be a long history of integrated and autonomous economic activity in most regions of Africa with local and long distance trade playing a linking role. This is not an attempt to paint a ‘golden past’ for Africa. Rather, it is meant to underline the fact that Africa had a healthy and fairly independent economic system before colonialism intervened to force a structural interaction with Europe (Austen 1987, 67-74; Leys 1996; Nzula, Potekhin and Zusmaovich 1979;9 Amin 1972; Alemayehu 2000b). The period leading up to the industrial revolution, and the 16th and 17th centuries, in particular, witnessed the beginning of the shaping of the African economy by European demand. With the onset of the industrial revolution in Europe, Africa lost its remaining autonomy and was reduced to being a supplier of slave labour for the plantations of America (Amin 1972, 107-110; Rodney 1972, 86-87; Munro 1976, 55; Bernstein, Hewitt and Thomas 1992). This era witnessed a widespread expansion of European control. This expansion was undertaken with the dual aims of: (a) incorporating new areas under primary crop production, using African land and labour (which were priced below world market prices); and, (b) increasing the level of production of existing primary commodities. On the import side, cheaper and purer iron bars, and implements such as knives and hoes were made available, displacing some of the previous economic activities undertaken by local blacksmiths. This had knock-on effects in terms of a reduction in levels of iron smelting and even a decline in the mining of iron-ore (Wallerstein 1976, 34-36; Baran 1957, 141-143;10 Alemayehu 2002b). As described above, there existed a reasonable degree of trade linkage with Europe in the pre-colonial period. Leaving aside the slave trade, the main feature of this trade was the export of primary commodities by African colonies to Europe. Thus, even before the onset of the colonial era, the seeds of Africa’s subsequent role (as a supplier of raw materials and foodstuffs for Europe, and a market for European manufactures) as well as its dependence on external finance had already been sown.11 Or, to take a slightly different perspective, a move from the production of primary products to processing of these products (by Africans and in Africa) was interrupted. This represents the first pre-designed attempt to articulate African economic activity to the requirements of the outside world. This development was vigorously followed up during the colonial period as a consequence of: (i) the so-called imperial self sufficiency in raw materials scheme (Hopkins 1973, 137; Longmire 1990, 202; Munro 1976, 128-137; Amin 1972, 112-117; Fieldhouse 1986, 48; Fyfe quoted in Wallerstein 1976, 36; Onimode 1988, 177; Konczacki 1977, 81; Austen 1987, 133; Rodney 1972, 172); (ii) the demand for primary commodities that emerged owing to the impact of the first and second world wars (Munro 1976, 119- 177; Burdette 1990, 84 ); and (iii) financing requirements for the creation of public utilities designed to serve (i) and (ii) (Bacha and Alejandro 1982; UN 1949; Munro 1976; Austen 1987; Alemayehu 2002b for details). Notwithstanding these common features, there was also variation of the colonial experience across different regions of Africa. Using the AminNzula classification (Alemayehu 2002a and 2002b), we have North Africa (NA), East and Southern Africa (ESA) and West and Central Africa (WCA). The fundamental distinction between these regions is derived from the manner in which the colonial powers settled the ‘land question’ (Nzula, Potekhin and Zusmaovich 1979, 36; Amin 1972). In West Africa, commodity production did not take a plantation form. Besides, until quite recently, the mineral wealth of the region remained largely untapped. The amount of African peasant land expropriated was also negligible. However, in spite of this, the control and growth of the commodity sector was governed by European interests, while land remained in the hands of small peasants (Amin 1972; Hopkins 1973, 213-214; Nzula Potekhin and Zusmaovich 1979, 38).12 In much of today’s Central Africa, and part of Southern Africa, concessionaire companies, usually supported by their European state, dominated the entire economic structure through their involvement in mining, fishing, public works and communication, and even taxation. In these regions, the indigenous population were reduced to semi-slavery, and exploited by open and non-economic forms of coercion on the plantations and mines. The colonial authorities encouraged adventurer companies to ‘try to get something out of the region’. The activities of these companies were organised in line with demand in the ‘mother country’. (Nzula, Potekhin and Zusmaovich 1979, 37; Austen 1987, 140-142; Seleti 1990, 40; Burdette 1990, 84; Amin 1972, 117). In Southern and Eastern Africa, both systems referred to above were intricately interwoven with a number of specific features. In this region the extraction of mineral and settler agriculture was accompanied by the creation, often by force, of a small, and often insufficient, reserve of labour comprising land owning peasants and the urban unemployed. This was undertaken with the labour demands of mineral extraction and settler agriculture firmly in mind (Amin 1972, 114-115; Nzula, Potekhin and Zusmaovich 1979, 37; Nzula, Potekhin and Zusmaovich 1979, 36; Seleti 1990, 34-47; Konczacki 1977, 82). The implication of all these is that, by the end of the colonial period, what had been achieved in all these macro-regions was the creation of a commodity exporting economy and virtual monopoly of the African trade (both import and export) by Europe. As a result, not only did production for overseas markets expand at a high rate, but also several new items (especially foodstuffs) started to emerge in the list of imports (Hopkins l973, 178). As noted by Konczacki, the economic pattern of what is called ‘matured’ colonialism13 in Africa has three distinct components. Firstly, both imports (which were mainly manufactured goods), and exports (mainly raw materials), were fixed with the ‘mother’ country. Second, capital investment in the colony was determined by the trading interest of the ‘mother’ country, and concentrated in exporting enclaves. Finally, a supply of cheap labour was ensured through a variety of mechanisms (legal, monopolistic employment and through other economic instruments.) (Konczacki 1977, 75-76). Indeed, it is worth noting that this pattern has not changed fundamentally, even today (Alemayehu 2002a and 2002b). In summary, it has been shown that African nations were in possession of an integrated and autonomous economic structure prior to their intensive interactions with Europeans. The historical interaction with today’s developed countries has shaped the structure of the economic activity of African nations, particularly in the areas of international trade and finance. Thus, given such a historical process it is not surprising to find that almost all African nations had become exporters of a limited range of primary products, and importers of manufactured goods, by the time of independence in the 1960s.14 This was further accompanied by a demand for external finance when export earnings were not sufficient to finance the level of public expenditures required for maintaining and expanding the commodity exporting economy. This structure has not changed in any meaningful way in the post-colonial era. Thus, when one examines the financial problems of Africa, which are related to its role as a primary commodity exporter, one is compelled to conclude that these problems are a direct outcome of such a historical process.
THE IMPLICATION FOR THE POST-INDEPENDENCE PERIOD
In the previous section, I have explained how a primary commodity and external-finance dependent economy has been created. The impact of the subsequent (after political independence) events of the boom in commodity prices, the oil price shocks of 1973-74 and 1978-79 and the evolution of African debt from the early 1970s onward would be difficult to understand unless an explicit link is made between the historically formed structure and the pattern of trade and finance in the period 1970-2000. This section briefly summarizes this phenomenon. This evolution of African trade and finance in the post-independence period could be categorized under three periods. The first period refers to the late 1960s and early 1970s. This period is characterised by the first oil price shock and the rise in commodity prices. The commodity price boom is followed by a sharp bust in 1974, and again after 1977 for coffee and cocoa (See Fig. 1 and 2). The response in most African countries is a rise in government expenditure in particular in the infrastructure sector. When the commodity price fell governments were not only unable to cut expenditure but also in need of marinating ongoing projects. This has been accomplished by increased borrowing owing to improved credit worthiness when prices of export commodities rise and due to belief in the cyclical nature of prices when commodity prices decline. This can be read from the pattern of trade and finance in a number of countries examined in the context of this study15 (Alemayehu 1997). The major point that emerges from examining this period is that following the rise in commodity price and access to loan, there was a rise in public expenditure. Given the inherited colonial structure that necessitated spending on social and physical infrastructure, the rise in government expenditure (and hence the beginning of debt creation) is not a policy mistake, as seems to be depicted in the good part of the African debt literature. This spending is necessitated by fundamental problems which were structural/historical, and the resulting policies are the reflection of this reality (Alemayehu 1997).

The above analysis shows that the early 1970s was characterised by a rise in the price of commodities in which African countries had specialised for historical reasons. It was also a period in which imports of capital and intermediate goods (mainly to develop infrastructure) increased. This effort was complemented by foreign borrowing. It is at this particular juncture that almost all countries were hit by the first oil price shock. This shock was tackled, partly by resorting to external financing. This was the case in Ghana, Zambia, Sierra Leon, and many other countries. The same was true in Kenya (although the price of coffee rose in the first half of the 1970s but fell in the second half leading Kenya to finance its balance of payment deficit by a rise in private capital inflow). Malawi also experienced similar problems, and private capital inflows (especially of supplier’s credit) were important in tackling the balance of payment difficulties. Another way of viewing the latter phenomenon is to consider the additional external finance (which eventually turned into debt) requirements of African countries as a policy response to the external shocks they were facing (Balassa 1983 and 1984; Ezenwe 1993). The question is whether such policy responses were rational. Should the shock be seen as a temporary one? Both on the part of African governments and creditors, these shocks were believed to be temporary. Given this belief (that is the expectation of an eventual rise in commodity prices) and given the then prevailing low real interest rate (which was even negative, see Khan and Knight 1983, 2), it seems reasonably rational that both lenders and borrowers responded in this way. As it turned out, the frustration of these expectations (secular decline in commodity price and rise in real world interest rate) put an enormous burden on Africa and not on Northern creditors.
In all these cases, the rise in commodity prices during this period was followed by an increase in government expenditure. True, there were domestic policy problems in managing public expenditure in this period. However, the nature of public expenditure did not constitute a reckless spending as is usually implicitly portrayed in the African debt literature. For instance, after the first oil boom in Nigeria, nearly 80% of public expenditure was on physical and social infrastructure. Capital expenditure was twice that of current expenditure. Public expenditure on trade, industry and mining rose from 7.3% in 1970-74 to 26% in 1975-80, transport from 21.3% to 22.2% in the two periods while general administration dropped from 22% to 13.6% (Mohammed 1989).17 Contrary to the case of Nigeria, current expenditure in Zambia was nearly 75% of total expenditure in 1970- 74 and this is largely attributed to the Zambianisation policy, which is dictated by the inherited colonial structure (Mwale 1983). Nonetheless, from 1972 (strengthened in 1974) the government attempted to curb current expenditure. For instance, consumer durable import was reduced from 28% in 1974 to 18% in 1978. Similarly, subsidies, with attending political costs, had been reduced in the early 1970s (Mwale 1983). In general, by the mid 1970s, public and private consumption had been substantially reduced from its high level in 1970 (Mulalu 1987). In Sudan the rise in government expenditure following the early 1970s was largely owing to decentralisation, infrastructure development and debt servicing (Galil 1994, 31-33). This pattern was similar in many African countries (Alemayehu 1997). Thus, following the rise in commodity prices and access to loans there was a rise in public expenditure. However, this in itself did not constitute a mistake. Given the inherited colonial structure that necessitated spending on social and physical infrastructure to address the problem of the hitherto neglected sections of the population, given the prevailing hope in technology transfer through import substitution, and the uncertainty about commodity prices, the expenditure was not a reckless spending. In fact, in most African countries the relative share of functional expenditure hardly changed following the commodity boom of 1973-74 in general and 1976-77 for cocoa and coffee exporters. The capital expenditure did change, however, as noted above, owing to the import substitution strategy pursued (Alemayehu 1997). In retrospect, it might appear a policy problem. However, it is difficult to expect that such infant governments (which were themselves the result of a unique historic process) would have had full foresight of commodity price decline.18 Even had they had such insight, the root cause of the problem was the deterioration of the terms of trade. The policy problem that emanated from failing to predict commodity price collapse and manage demand was a secondary one. This argument should not be taken as endorsing some white-elephant investments carried out in some African countries, however. Perhaps the major domestic policy problem associated with the rising expenditure was the way in which the import substitution (IS) strategy was conducted. While the IS strategy was a sound one, it was carried out in the context of a disarticulated production and consumption structure. The latter is in particular vivid in the neglect of: the industrial and agricultural linkages (as it was based on the urban elite’s patterns of consumption); neglect of the future demands for recurrent cost of intermediate inputs; and development of the human capital required. However, the fundamental problems were structural/historical and the resulting policies are therefore a reflection of this reality and hence secondary in their effect.19 This pattern was compounded by another development in the global financial markets. The oil price hikes not only forced oil importers to become more dependent on borrowing, they also created what is called the OPEC surplus – pax Arabica? (Bacha and Alejandro 1982). This surplus was circulated through the international banking system. The Euromarket became an important source of financing for a number of African countries, which had never borrowed before (Mistry 1988). The situation was reinforced by a second oil price shock (Salazar-Carrillo 1988 in Taiwo 1991, 39; Ezenwe 1993). The new funds borrowed were spent on mining companies and major public projects. But, in general, these loans were characterised by harder terms. When the second oil price shock came in the late 1970s, with commodity prices continuously deteriorating as shown in Fig. 1 and 2, most countries were unable to absorb the shock. Thus, by the end of the 1970s the total external debt grew almost fifteen fold (see table 2).20 The second period refers to the late 1970s and early 1980s. The end of the 1970s had witnessed the second oil price shock.21 Major commodity prices continued to decline, prompted, inter alia, by the recession in the industrial countries. The early 1980s was also characterised by a hike in real interest rate in industrial countries, chiefly due to lax fiscal and tight monetary policy of the USA.22 By 1981, the real foreign interest rate was 17.4% compared to -17.9% in 1973 (Khan and Knight 1983, 2). The latter aggravated the interest rate cost of non-concessional and private debts that became increasingly important during this period (Alemayehu 1997). This development prompted many African governments to continue borrowing (and get credit) on the assumption of a cyclical turn around in commodity prices. These new loans were used to finance enlarged oil bills and avoid sharp politically/socially disruptive cutbacks in public expenditure (Mistry 1988, 7). The experiences of most countries, such as Ghana, Zambia, Malawi, Tanzania, Sierra Leone, Libya and Nigeria during this period generally confirm this pattern (Alemayehu 1997). The third period refers to the late 1980s and the 1990s. This period, as that of the late 1970s, was generally characterised by continually declining commodity prices and the deterioration of terms of trade. For the period 1985-90, when a large number of African countries undertook adjustment programs, the deterioration in the barter terms of trade of nine major export commodities resulted in a 40% decline in average export revenue (compared to the 1977-79 average), despite a 75% increase in export volume (Husain 1994:168). As a result, African countries became more vulnerable to further indebtedness. Moreover, the capitalisation of amortisation and interest payment through the Paris and London clubs rescheduling had also started pushing the debt stock upward in many African countries (van der Hoeven 1993; Alemayehu 1997). Given this general pattern from the mid 1980s to the early 1990s, African economies were extremely indebted by the end of the 1990s. Moreover, not only investment in infrastructure (like the transport sector) which needed external finance for its maintenance, almost all countries had become dependent on external finance for securing imported intermediate inputs and ensuring the smooth functioning of their economy (Ndulu 1986; Ngwenya and Bugembe 1987; Fantu 1991; Rattos 1992; Mbelle and Sterner 1991; Alemayehu 2000b). Thus, throughout the period under analysis the value of import was persistently increasing in almost all countries.23 This recurrent import demand problem was compounded by actual running down of the capital stock, including infrastructure. Thus, starting form the late 1980s such historically structured African economies were vulnerable to events such as the industrialised economies recession, following the global monetary shock of 1979-81, which depressed commodity prices. This is also a time where the world economy witnessed: (i) the emergence of high, positive real interest rate throughout the 1980s which increased the debt service burden of indebted countries, (ii) protectionism in the world market for agricultural products and low technology manufacturing which hampered diversification attempts and, finally, (iii) the prevalence of repeated official and private rescheduling, often at punitive terms (Mistry 1991, 10-11). This crisis widened the role of multilateral finance despite being available at unacceptable terms – policy conditionality. Thus, another major development in the 1980s and early 1990s was the growth of multilateral debt, especially that owed to the World Bank and African Development Bank and to a lesser degree the IMF. The main reasons for an increase in debt owed to multilateral agencies were: (a) the stepping in of these multilateral banks to finance the partial bail-out of commercial banks in the 1980s (Alemayehu 1997), (b) the fact that these debts were denominated in SDR and ECU while most African countries earned their currency in US dollars, which had depreciated against both SDR and ECU for the last 30 years24 and finally, (c) the growth of adjustment financing (Mistry 1994 and 1996). In sum, by the end of 1990s African countries found themselves not only being extremely indebted but also structurally unable to pay back their debt.
Developing Countries and Newly Industrialised Countries

1 Introduction

Economically, the world can be divided into groups of countries:

• First world – a small group of rich industrialised countries, e.g. in Western Europe, North America, Australasia and Japan.
• Second world (not so rich as first world) – former communist countries of Eastern Europe, e.g. Russia, Poland, Hungary.
• Third world – a large group of poor countries in Asia, Africa and Latin America. These are also called developing countries or sometimes less developed countries (LDCs). Even within this group there are wide variations in prosperity, e.g. the newly industrialised countries of Hong Kong, Malaysia, Thailand, Taiwan, Singapore, and South Korea – the so-called ‘Asian tigers’ – have achieved rapid rates of economic growth in recent years and have closed the gap in living standards between themselves and the developed world.

2 Characteristics of developing countries

The characteristics of developing countries are different from each other but they do face some common problems.

2.1 The root of the problem. The production possibilities of an economy depend on:

• the quantity of its resources (land, labour, capital and enterprise), and
• the quality or efficiency of these resources.

Developing countries lack resources, particularly of capital, which has driven the economic growth of the developed world. Labour is not highly productive because of malnutrition, poor health and limited education. Land is often infertile due to climatic factors and past over-farming.

2.2 Characteristics

• Poverty. Three-quarters of the world’s population have incomes which are considerably lower than those in the first world. However, even within developing countries there are also wide differences in income and wealth. Even the poorest countries have a rich elite.

• High population growth. Birth rates and death rates are higher than in the developed world but death rates are falling with improvements in disease control and public health, such as clean water and improved sanitation.
• Agricultural dominance. About 70% of the population live off the land. Agriculture is largely at subsistence level – backward and threatened by natural disasters such as drought and man-made disasters such as civil wars. Manufacturing, therefore, contributes very little to GNP.
• Unemployment and underemployment. In the countryside there is underemployment caused by the seasonal nature of traditional farming – outside the growing season there is little to do. In urban areas there is high unemployment, but higher wages in the towns attract people in from the country in the hope of gaining a job.
• Lack of industrial capital – and hence a lack of investment in factories, offices and machinery.
• Lack of infrastructure. There is a shortage of social capital – facilities like ports, roads, railways, electricity, schools, sewage disposal, etc., which are vital to economic development.
• High dependence on one or two exports. These are usually primary products such as food or raw materials.

3 Domestic constraints on economic growth

3.1 Problems with investment. Growth depends on investment in capital. However, this raises a cruel dilemma because investment diverts resources away from the production of basic goods and services. In the short run, developing countries have to worsen their standard of living in order to improve it in the long run. Investment has to be financed. This finance may come from saving, taxation or borrowing from abroad in the form of aid or commercial investment. In most developing countries the level of saving is low because people cannot afford to save. Banking systems are not sufficiently developed to gather and channel savings to potential investors. Tax revenues are low because incomes are low. Aid and foreign investment is insufficient.

• Inefficiency. Industry is inefficient because of the lack of investment in industrial capital and infrastructure. The quality of the labour force suffers from underinvestment in human capital, i.e. in healthcare, education and training.
• Population growth. The rapid rates of population growth tend to cancel out the abilities of these economies to increase their output. This results in a lower output and income per head of population.

• Migration to urban areas. The movement of underemployed workers from rural areas to urban areas, i.e. from farming to more productive manufacturing industry, is essential for development. However, in many countries migration has been so rapid that the urban labour supply has grown faster than job opportunities. This has increased unemployment, and overcrowding has added to pollution and congestion.
• Social and cultural factors. In some countries, people are attached to a traditional way of life and are unwilling to change.

4 External constraints on economic growth

4.1 Falling export earnings. Developing countries typically depend on the exports of one or two primary products to earn foreign currency which they need to pay for imports of food, fuel, machinery and to repay debt. World production of agricultural products has expanded rapidly in recent years, forcing prices down. Demand for such products tends to be price inelastic so that exporters have suffered falling revenues. Demand also tends to be income inelastic, so although the developed world has experienced rising incomes, demand for agricultural products has not risen substantially.

4.2 Trade barriers. Trade problems have been made worse by some developed countries erecting protectionist barriers against food products, e.g. the EU’s Common Agricultural Policy, and imposing controls on manufactured goods such as textiles which they claim are ‘unfairly’ produced by cheap labour.

4.3 Multinational company activity

Multinationals bring benefits to developing countries (see notes in Unit 1, Microeconomics, Topic 3, Supply). However, they also create problems.

• Multinationals have great power and may use the resources of a country to produce a product that is in their company’s interest rather than in the interest of the producer country.
• Methods of production have at times created great environmental damage.
• Profits are returned to shareholders in the home country of the company and not spent in the producer country.
• Tax may be avoided by a process known as transfer pricing, thus reducing the revenues of the host government.


4.4 Debt crisis

In the 1970s the price of oil increased sharply and non-oil producing developing countries had to borrow heavily from overseas banks to pay the increased bills. The major oil-producing countries such as Saudi Arabia and Kuwait invested their increased revenues in foreign banks. These banks in turn needed to lend out these funds to make a profit, and developing countries were targeted.

The 1980s were a disaster for the third world. Falling export earnings and rising interest rates reduced their ability to repay their debts. Particularly affected were Mexico and Brazil. African countries suffered too, e.g. Uganda spends more on debt repayment and interest charges than on education and health combined. So third-world countries had four options:

• Borrow more to finance their debt repayment, thus storing up more problems for the future. This has resulted in some countries now paying out more than they receive.
• Default on their debts and risk not getting future loans.
• Reduce imports by imposing tight fiscal and monetary policies in order to reduce demand.
• Appeal to the IMF for help. The IMF supplied funds and renegotiated the terms of debt repayment with the creditor countries but in return insisted on the tight fiscal and monetary policies referred to above. These policies often harm the poorest citizens of the debtor countries and have led to social unrest, e.g. in Indonesia.

Different countries have used all four options but each has had the effect of restraining economic growth.

5 Development strategies

Strategies which can be used to improve economic development vary according to the individual circumstances of the country concerned. Those which are appropriate for one country may be inappropriate for another. Policies should aim to improve the demand side, e.g. increasing the demand for third-world exports and the supply side, i.e. increasing the quantity of resources, particularly capital, and improving the quality of resources. Strategies are now aimed at sustainable development, i.e. development that brings lasting gains in employment and living standards, reduces poverty and does not damage the environment.


5.1 Strategies include:

• Increasing productivity in agriculture. This has the effect of increasing food supplies and raising incomes in the rural economy, which in turn reduces the need for imports and creates a market for industrial goods.
• Encouraging an increase in savings. Funds are then available for investment. This has been successful in the Asian tiger economies. For poorer nations, aid from the developed world is needed for initial projects. The nature of this aid has changed in recent years. Early aid was aimed at capital-intensive projects such as steel plants and chemical works but now it is targeted at labour-intensive projects which make use of intermediate technology that is cheap, easy to maintain, simple to use and environmentally friendly.
• Export-led growth. This requires switching from low-earning primary commodities to industrial products in which the country has a comparative advantage. In the early stages of development these will rely on labour-intensive, low-technology methods. This was successful in the newly industrialised countries of Latin America and Asia. Cheap imports of textiles, shoes, televisions, toys and others created some problems in developed countries and protectionist measures were adopted. However, the World Trade Organisation has been successful in starting to have these reduced.
• Investing in infrastructure. In the richer developing nations, e.g. the ‘tiger economies’, as incomes have increased governments have used increased tax revenues to invest in roads, ports, research, education and training, etc. In poorer countries, there is an ongoing need for aid from the developed world. This aid has been targeted towards low-cost housing, water supplies and sanitation, primary schools and preventative healthcare which is cheaper than curative medicine.
• Population policy. Some developing countries have initiated campaigns to limit family size and provide cheap birth-control facilities.

6 Aid from the developed world

6.1 Motives for giving aid

(a) humanitarian
(b) political – both communist and non-communist gave aid to countries to win political friends
(c) economic – if the developing world becomes more productive and prosperous they will be able to contribute more to the world economy and provide markets for other countries.

6.2 Types of aid

(a) Gifts of foodstuffs for humanitarian reasons.

(b) Grants and loans. Grants do not have to be paid back and have no conditions on how they are spent. However, because of corruption, developed nations are reluctant to give this type of aid. Loans may be at commercial rates of interest or they may be ‘soft’, i.e. at rates below commercial rates.

(c) Writing off debt. A recent initiative has seen the US and British governments write off the debts of certain countries on condition that the money saved is used for the relief of poverty.

(d) Tied aid. Grants or loans may be tied to the purchase of equipment from the donor country.

(e) Technical assistance and education. Technical experts may give technical advice and wealthier nations provide facilities and finance for overseas students to attend universities and colleges.

(f) Bilateral and multilateral. Bilateral aid is given by one country to another. Multilateral aid is given by the main international agencies, the World Bank and the IMF, which are in turn given the funds by member countries.

6.3 Disadvantages of aid

(a) Aid may not reach those most in need. It may be diverted into military investment or into prestige projects which benefit those already well off.

(b) Donors may finance capital expenditure on a project such as new roads, but fail to support current expenditure such as repairs and maintenance.

(c) Tied aid may force a developing country into buying equipment, etc. from the donor when it may have been cheaper to borrow and look for a cheaper supplier.

(d) Aid can lead to dependency on rich countries and can reduce the poorer country’s incentive to grow from its own resources.

(e) Food aid can destroy local agriculture by driving down prices.


7 Newly industrialised countries (NICs)

7.1 A number of countries previously categorised as LDCs have developed their economies and have become important players in the global economy. These include Taiwan, South Korea, Singapore, Hong Kong, Mexico and Brazil. They have characteristics which separate them from other LDCs:

• large increases in growth rates
• rapid development of manufacturing industry
• rising exports
• rising standards of living.

7.2 Reasons for rapid development:

• High rate of capital investment financed by a high rate of consumer saving and from growing export sales.
• Much of the new investment has been in knowledge-based, high-value-added industries.
• Large investment in education and training has improved the quality of the labour force.
• Movement of labour from low-productivity industries, e.g. agriculture, into high-productivity industries.


International Trading and Monetary Organisations

1 The World Trade Organisation (WTO)

The WTO consists of about 120 countries. The WTO was formed in 1995 and replaced the General Agreement on Tariffs and Trade (GATT), but with much stronger powers of enforcement. It exists to negotiate reductions and removal of trade barriers between member countries. A country can complain to the WTO about unfair restrictions taken against it by another country and if the complaint is justified the WTO will enforce the offender to change their policy or offer compensation.

2 The International Monetary Fund (IMF)

The IMF was set up in 1947 to promote world recovery after the Second World War. It has continued to this day and now has over 160 member countries. It acts as an international bank which aims to:

• encourage the growth of world trade
• provide conditional financial support to member countries with balance of payments difficulties
• help members facing currency collapses with large-scale loans
• offer assistance on matters of economic policy.
 

In recent times it has given substantial help to Russia and to several Asian countries such as Indonesia and South Korea.

The IMF has been criticised for propping up inefficient, mainly third-world economies by giving loans at less than commercial rates, but on the other hand it has tried more recently to give loans conditional on governments imposing tight economic controls on their expenditure.

3 The World Bank (International Bank for Reconstruction and Development: IBRD)

The World Bank was set up at the same time as the IMF. While the main aim of the IMF is to help countries with short-term difficulties in their balance of payments, that of the World Bank is to provide long-term assistance for development. It is now the world’s largest source of multilateral aid. Member countries contribute funds in proportion to their national income and loans are made chiefly to developing countries at low rates of interest. At first loans were given for infrastructure projects, but more recently they have been targeted at projects that relieve poverty in the longer term, such as healthcare and education.