The Prospects of Global Economic Development - Essay Example

Global Economic Development xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date 1. Introduction The business world is experiencing a tremendous increase in the free trade between the developing and developed countries. This has been as a result of several benefits that are likely to be gained from free trade. Of important to note, are the losses that may be experienced due to protectionism whether by non tariff and tariff barriers. Protectionism, as many critics describe it, creates poverty, leads to decrease in prosperity. In actual fact, it does not protect industries or domestic jobs. Indeed, it destroys them by harming the export industries and those that rely on imports in order to manufacture their goods. Free trade is described as a trade whereby the government does not create restrictions in the import and export of goods among different countries. Basically, the government does not impose any discrimination between foreign and national goods. Benefits of free trade The economic theories may be used to explain the benefits of the free trade. Comparative advantage theory, coined by David Ricardo’s, demonstrates that a country may benefit from free trade. Specialization is seen to be possible and to some extent beneficial to a country even when a country lacks absolute advantage in production of goods. A country may greatly benefit from free trade if it locates resources on the goods that may be obtained from other countries at a cheaper price and export their goods to other countries. However, a country may only benefit if it trades with other countries that have embraced free trade. As a result of specialization, boosted by free trade, a country is therefore, able to produce commodities at a lower cost. Consequently, production efficiency is increased and cost reduction is experienced. This eventually leads to improvement of the living standard of the people (Jeffery 2004). According to the economy theory, there are various benefits likely to be experienced as a result of free trade. Firstly, a consumer can obtain cheaper commodities due to free trade. Of course, freely imported commodities are cheaper. Of important to note is that a situation where monopoly arises is not permitted ad the prices are therefore, not increased. Actually, competition increases as each country produces the commodity at a lower cost. Furthermore, the country continues to decrease the costs. In addition, domestic industries are at a position to receive equipments, raw materials and chemicals at a reduced cost leading to the lowering of the prices. Secondly, competition is promoted as a result of free trade. This competition compels firms to improve quality, reduce costs and adopt better techniques of marketing and producing of commodities. This also leads to the reduction of monopoly. Expansion of market is another benefit created by free trade. This has led to development of industries and productivity. Different countries have increased their production due to presences of a wider market. Most developing countries with few industrial markets, for example Nepal, mainly depend mostly on free trade with other countries in order to develop physically and economically. Finally, countries can have a gain in technology. Improved technology has a great significance in the industrial development. Free trade has assisted in improving technology from the foreign countries. Consequently, it can increase in the flow of capital (Craig and Georgi 2011). Losses due to protectionism Despite the favor of free trade and openness protectionism is still practiced. There has been a transition of protectionism, both in volumes and types of goods traded international. These changes have forced many countries to revise the tariff schedules and change the policy in order to protect the domestic manufacturers. However, welfare losses have been felt as a result. Trade in services such as insurance, transportation; consulting, legal services and telecommunication are some of the areas that are most affected and limited through accessing markets. Barriers of trade can also be an obstruct mobility of capital and people, leading to a great loss economically. However capital mobility was not a factor of financial crises in developing countries (Scheve & Saughter 2006). The effect can be great through financial protectionism such as legal restriction on capital flow, control of prices and restrictions of foreign equity (Bouët et al 2008). According to IMF report, financial openness was based on price based and quantity based measures to all national borders. The two measures did not coincide because the legal restrictions were not followed to the letter especially to the investors who had the rights of investing in a particular country. Slow trade negotiations also reveal indirect degree of protectionist in governments. Protectionism has also delayed trade agreements.WTO is an example of a trade negotiation that has taken a longer period of time. It started in 2001 and it was expected to be complete by 2005 but it’s still in progress, due to US and India failing to agree on matters that are related to poor countries being protected from competition. According to the meeting that was held in Italy 2009, the G8 leaders confirmed their commitment towards open and free market and rejected the protectionism of all kinds (Miniane 2004). Protectionism of trade in goods and services can give rise of costs, due to market distortions. Subsidies, guarantees and bail plans. It can push up or down the costs of competitors who deal with imported goods. Countervailing of duty orders can also be used, hence preventing competition through merit and increasing favourism to the local producers in the market. However less welfare is being associated with political powers that lead to indiscriminate of subsidies and corruption (Scheve & Saughter 2006). According to Trade liberalization and economic performance comments, imposing of tariffs cannot increase welfare, but trade liberalization can promote growth and development (Santos & Thirlwall 2004). The other effects do occur especially when protectionism interfere with efficiency during the allocation of resources in the economy. They also restrict the producers to specialize in goods and services that are not competitive. A food crisis was another sensitive issue that brought out the strong effect of countries that are exporting goods from abroad. However these have cause difficulties in terms of payment if the government will not intervene (Mody & Murshid 2005). 2. Import Substitution policies Importantly, most countries are developing different policies that are being applied in the regulations of business activities in the world of business. Import substitution policies are one of the policies established. The import substitution policies may be defined as those policies that a government may establish to decrease foreign dependency of the country economy. A country may establish this through the increase in local production of industrial products and food. It mainly advocates the replacement of import with the domestic production. Essentially, it is based on the principle that a country may attempt to reduce most of its foreign reliance through increase in its industrial production leading to an augment of the local goods. Most Latin countries had implemented the imported substitution policies with the basic intention of becoming self-sufficient and therefore, decrease vulnerability to the terms seen in the world of business. This strategy is mainly complemented with economic development trough subsidization of important agriculture and industries and nationalization. One of the major characteristic of this regime is the protectionist trade policy (Holmes and Stevens 2005). Of importance to note is the view that most import substitution policies have never worked. Most critics view these policies as a major channel of creating obsolete and inefficiency products as the country is not sufficiently exposed to the international competition. Participation of a country in the international trade is minimized. Unemployment cases increase internationally due to the decrease in the World GDP as a result of inefficiency promotion. It is noted that most countries that adopted these policies did face undesirable effects which include persistent problems with the balance of payments and trade. It is argued that although the policies are aimed at reducing reliance on the world trade, there is the basic need of a country to import machinery, raw materials and spare parts. In countries that had imposed the import substitution policies, overvalued exchange rates and trade protection increased domestic prices. Therefore, export became less competitive. As a result, most countries handling import substitution were not capable to export sufficient commodity to be able to obtain more imports. It was observed that as the economy grew, the more a country needed to get more imports and the exports could not keep up with the increase need of the imports. Therefore, most of these countries had a deficit in the foreign currency. This led to most government restricting imports to the essentials. For example in Sri Lanka, its currency was devalued so as to make the exports more attractive and to increase the prices on the imports. The industrial investments were subsidized. The government therefore, experienced chronic revenue deficits and this resulted to printing of more money. Basically, the country experienced inflation which led to the domestic goods becoming more expensive and reducing the export (Maddison 2003). However, as much as import substitution is said to be not working, some need to be recognized as successful. Some have led to the increase to the increase of some countries economic and production development, increased in domestic employment. In addition, resilience during the global economics for example, depressions and recessions is observed as a result of import substitution. It is therefore, safe to consider that import substitution policies, though perceived as effective, have not worked in most countries that had previous established the policies (UNTCAD 2009). Arguments against free trade In the trade world, various arguments have been raised against free trade. Most trade critics do believe that free trade has some weaknesses which have great effects on the business world. Increased in competition is one of the challenges directed to free trade. It is said that when a country opens its border to international trade; the country tends to experience fierce competition. The country is said to trade slow in its local manufacture goods. However, others may argue that the competition ensures the quality of the commodity offered is excellent. In addition, the consumer is able to obtain goods of high quality at a reduced cost. The firms involved in the international trade are therefore, forced to ensure that their products are able to maintain the competition that is perceived in the business world (UNTCAD 2009). Still, increased unemployment has been argued to be a negative effect of free trade. This is said to be as a result of increased in competition leading to some countries gaining advantages over others. This advantage is seen to be through advanced technology. For instance, the free North America zone that comprises of Mexico, Canada and United States, due to technology superiority, United States is seen to have less unemployment levels as compared to Mexico (Maddison 2003). To some extent, this may be quite true. Nonetheless, most international firms create employment opportunities in the country where they carry out trading activities. Basically, though various criticisms have been raised against free trade, the arguments are not strong enough to reduce the effectiveness of freed trade in the current business world. 3. Forces shaping global economic development in relation to automotive industry The automobile industry has continued to be an outstanding vehicle for a deeper understanding on the forces that have continued to shape the global economic development. The industry has been labeled as a mature industry with backward technology, overcapacity, saturated demand, rising liability, declining employment and slow growth. However, the voice of industry has it that the automotive industry is a growing sector. As most economists would put it, the current global economy is still on the recovery road from an economic crisis. Most industries are therefore, embarking on growth to ensure a sustainable economic growth. Automotive industry is one of the industries rebounding from the financial crisis that was globally felt (Boyer and Freyssenet 2003). Basically, the automotive does present an excellent example of the development in the global economy. This has been seen from the growth of the industry after the global financial crisis. For example, it is predicted that production of the global light vehicle will increase by 25.8 million units between 2010 and 2017. This will ensure that revenue growth will increase for the next few years. Increase in the revenue will result to boosting to a country’s economy. The global growth is said to be as a result of an increase in emerging markets especially in China which has in the recent years been the largest markets for the automobile. In addition, it is the fastest growing market. Apart from emerging markets, exchange rates and demand are other major macroeconomics factors that have affected profitability of the automobile industry. These factors have been perceived as important and the automobile companies are pursuing these strategies. Of importance to note is the fact that most automobiles firms are still not confidence with the global economy in relation to the exchange rates. A few of these firms are making changes in the corporate strategies in order to deal with the uncertainty of the economy. One of these changes involves creating business models and making their operations more flexible in order to respond to the demand (Coe et al. 2008) According to the International Monetary Fund, growth rates are being predicted to be sluggish in the developed economies but the markets that are emerging are providing an excellent opportunity for the automotive companies to be effective in the market. Creation of these markets does reflect the global one of the forces that is said to be shaping the global development growth. Automotives companies are primarily seen to concentrate on emerging markets in China, Russia, Brazil and India. In actual fact, these countries are regarded as the vital sources of automotive future business. In the business world, emerging markets are parallel to the demand. Indeed, demand is one of the factors shaping the global economic development. In China, for example developing towns are evident especially in the eastern region. Thus, demand has soared in this region. In addition, western and the interior provinces are increasingly becoming developed and this result to untapped regions to grow, increasing the demand. The automotive companies have resulted in putting the consumers at the core of innovation. Customers do play a major role in the economic development. Most companies are focusing on sustainable technologies to capture the interest of the customers. These companies have gone ahead to develop products and services that are environmentally-friendly. This is a great strategy as it is leading in improving the fuel economy and reduction of the emissions of carbon dioxide (Dicken 2007). Competition has been outstanding in the automotive industry. This has also been rampant in the global economic development. As a result of increased global trade, the world commercial systems of distribution have grown influencing the global competition in the automotives firms. In particular, Japanese automakers have instituted various innovative methods of production whereby they are modifying the United States model plus adapting technology that is enhancing production and competition for the product. Of interest in the competition is the continuous merging of giant firms in the automotive industry. Acquisition and mergers are factors that have led to the shaping of the global economic. Major United States automakers have merged, that is, Ford, GM and Chrysler and have established strategic partnership with Japanese and other European automobile manufacturers (Dicken 2007). Most of these mergers were initiated to strengthen their markets in the competitive market especially in the United States and other European countries. Consequently, the firms have been able to expand to the overseas markets. The merging firms have also been able to penetrate the European market which is the largest market for automobiles. This is attributed to its sophisticated and concentrated global network. These companies that have merged have undergone swift technological changes. Global financial crises have had major effects in shaping the global economic development. The crises majorly affect the sales and production of goods in a country. For instance, in 2008 the global financial crisis had a great impact on the international automotive markets when the sales of automobile plummeted in Europe and United States. Yet, the signs of the economic decline started in 2007, and the United States and Japanese motor vehicle sales did fall from 2007 to 2008. The crisis that affected the automotive industry led to the decrease in cash flows and to some extent causing a reduction in the profitability especially in the United States resulting to bankruptcies in some companies. Companies, for example Chrysler and GM sought for bankruptcy protection while Ford maintained independent as a result of a process of debt reconstructing (Boyer and Freyssenet 2003). Foreign Direct Investment (FDI), governments and international trade are forces that have played a role in shaping the economic development globally. Similarly, in the automotive industry the same dynamic has been observed. For instance, accordance to the World Trade Agreement (WTO), most developing countries is liberalizing their automotive markets. China, for instance, has reduced the import tariffs on auto parts and automobile to 10 percent and 25 percent respectively. Consequently, the domestic automakers have been exposed to external competition. The government provided the industry support during the global financial crisis. This was through in China, for example where its action to spur the economic growth in investing massively in the infrastructure and special assistance spilled over into a higher automotive industry. In addition, increased subsides in the auto scrap, lowered purchase taxation have boosted the demand of the automotive beyond expectations. Overall, the governments have applied a great role in enhancing international trade and positive business interventions that have directly and indirectly affected the automotive industry (UNTCAD 2009). The ongoing shift in the global economic activities, that is, from a developed to developing economy accompanied by the tremendous growth in the number of customers in the emerging markets, increased role of the government, labor productivity are the major forces shaping the global developments that have been identified. In addition, increase free flow of information and advanced technology are also critical in the global development. The forces have generally had an impact on the automotive industry as it is a major play in the global business activities. As a result, the automotive industry can be used to understand the forces that are shaping the global economic development as most of these forces are affecting the industry too. REFERENCES Bouët, A., Decreux, Y., Fontagné, L, Jean, S. & Laborde, D. 2008. Assessing Applied protection across the World. Review of International Economics, Vol. 16(5) Boyer, R and Freyssenet, M. 2003. The Productive Models: the conditions of profitability. London; Palgrave Macmillan Coe, N., Dicken, P, and Hess, M. 2008. Global production networks: realizing the potential. Journal of Economic Geography, Vol. 8 Craig, J, Georgi, M. 2011. Aftermath: a new global economic order? New York: New York University Press Dicken, P. (2007). Global Shifts. Mapping the Changing Contours of the World Economy. London: Sage Holmes, T and Stevens, J. 2005. “Does Home Market Size Matter for the Pattern of Trade?” Journal of International Economics Jeffery, J. 2004. Free trade agreements: US strategies and priorities. New York: United Book Press, Inc Maddison, A. 2003. The World Economy: A Millennial Perspective. Paris: OECD Miniane, J. 2004. A new set of measures on capital account restrictions; IMF Staff Papers Mody, A. & Murshid, A. 2005. Growing up with Capital Flows. 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