Global Free Market Mechanism - Case Study Example

«Global Free Market Mechanism» Introduction The present era is marked as the era of globalisation. Globalisation rides the vehicle of free trade among nations and that is often guided by certain central agencies like International Monetary Fund, World Bank and World Trade Organization etc. The term ‘free trade’ refers to the concept where trade among nations takes place without any sort of government interference through the imposition of any kind of trade barriers. (Salvatore, 2002) From decades a debate between the proponents of globalisation and free trade and the proponents of protectionist policies is of immense interest to the academicians and politicians alike. The scholars favouring protectionist policies mainly stand for planned economy with strict government intervention whereas those favouring globalisation believe solely on demand supply interaction for restoring equilibrium within the economy. (Thirlwall, 2003) Between these two extremities lies another possibility that of a mixed economy. In a mixed economy both planned and trade based operations are considered with varying weights. Most of the developed countries, such as United Kingdom (UK), United States of America (USA) etc. have embraced free trade for long. However, developing countries like India and China with many others gradually liberated themselves to the external world and entered a free regime from a protectionist one mainly from 90’s. (Agarwal, 2006) The present global scenario cannot be perceived without international trade that might well be classified as the other name of free trade and that leaves a burning question - whether some countries should be protected from international trade or be left alone with others to float along the main flow of global trade? A comparative analysis of International trade regarding its advantages and disadvantages would reveal the answer of the above question. However the answer might still be ambiguous and require further research to be universally accepted. The free trade doctrine owes its origin to no other than Adam Smith. Smith was perhaps the first proponent of free trade following his absolute advantage principle. However when it was realised that trade might not take place between two nations following absolute advantage then David Ricardo came to rescue and said even if a country has absolute advantage over the other regarding all the commodities, trade might take place between them following comparative advantage rule. (Bo Sodersten, 1980) The international trade that we witness today is a modified form of these two doctrines. The later classical economists were mainly responsible for the modification, alteration and justification of these two principles that eventually shaped the present form of international trade. The advantages of free trade as believed and forwarded by its proponents are mainly of two forms - economies of scale and economic efficiency. Following the comparative advantage doctrine if free trade is embraced all the nations can mobilise its resources to the production of the product in which it has comparative advantage. This will bring specialization as well as economies of scale and the quality along with the quantity of the products produced will rise, creating a global optimum equilibrium condition. The global production possibility frontier will shift outward depicting higher production levels for all the commodities concerned. (Salvatore, 2002; Bo Sodersten, 1980) Non-interference of the government has another important outcome; it has been observed that in a strict planned economy paperworks eat up valuable time. Often a political bureaucratic nexus leads the trader into jeopardy. Economic inefficiency creeps up through higher price of the imports in such an economy and the consumers often have to bear the brunt or have to settle with less quality indigenous products. In such a scenario the economy is characterized with higher level of dead weight loss. It is believed that free trade as the main form of international trade is bereft of these evil outcomes and is capable of guiding all the economic agents to an optimum combination empowered with an automatic equilibrium restoration mechanism through the interaction of market forces. (Thirlwall, 2003; Ray, 2002; Agarwal, 2006) A brief discussion of arguments favouring free trade over planned economy would be of special importance regarding the justification of a country embracing international trade. Among the modern economists Jacob Viner in 1950 has shown that lowering the tariff would attract more gains, demand and supply side alike. The benefit to the demand side is comprehendible but the benefit to the supply side comes from increased inflow of resources as a reallocation process to the firm operating with highest level of comparative advantage. Viner termed it as trade creation. (Cherunilam, 2008; Caves, 2000) The earlier proponents of free trade however vouched for it following more of a moral reasoning than economic one. Richard Cobden supported free trade on the basis of right. It was believed that free trade would reduce the possibilities of war. (Reynolds, 2006) However the strongest of the arguments favouring free trade comes from its capabilities in reducing the poverty. Free trade and poverty are inversely correlated and various grounds justify this relation. First, of all free trade gives access to better product at cheaper price and thus enriches the consumer basket of the poor population. Secondly, if free trade comes with the labour migration, especially the skilled one then it offers employment opportunity to the poor household. In their country of origin employment opportunity might be less but once they migrate to a country with higher opportunity, they might not be unemployed anymore. Relocation in this case will result in reduction of unemployment that will eventually lead to higher level of income to the poor household resulting in increased demand and thereby output. Such a job creation through free trade would increase the livelihood of the impoverished people. Furthermore the migrated labourers will send remittence to their motherland thus improving the economic livelihood of their family living out there. As the effective demand of their family left out at their nation of origin raises (since, now they have the remittence in their hand to spend) so as the national output of their mother land as effective demand is equal to aggregate demand or output at equilibrium. (Jolly, 2003; OECD, 2008) One of the most important arguments usually forwarded in favour of international trade is technological diffusion. The developed countries are technologically ahead of the developing and less developed countries. International trade often comes with technological help shared by the developed countries with the developing and less developed countries. This technological expertise plays important role in technological advancement of the developing and less developed countries. (Berdell, 2002) Again the foreign fund acquired through international trade is considered as an important ingredient strengthening the backbone of developing and less developed countries and boosting their macro economic scenario. Dollar is still considered as the world currency even considering its depleting nature in recent times. Currencies of other nations are mostly valued against dollar and a higher value indicates the strength of the currency. The more dollar reserve the nation has the more is the strength of its currency and the healthier is its economy both in short run and in long run. The importance of international trade in terms of acquiring dollar is well acknowledged by the scholars. (Batiz & Batiz, 1994) Apart from the aforementioned arguments furnished in favour of free trade it has also been argued that free trade helps to cut down the military expenditure of a country. The most frequently cited example of this proposition includes USA and the former Soviet Union. USA a relatively free natured economy in compare to Soviet Union incurred much less military expenditure in comparison to Soviet Union. (Holzman et all., 1980) This phenomenon has a long run consequence; if the expenditure becomes too highly weighed against GDP the country might succumb to that pressure and that’s what have happened to Soviet Union, as many believe, following their long fought battle against Afghanistan. (Deger & Sen, 1990; Hayes, 2001) After considering the benefits associated with international trade one might jump into conclusion that international trade can definitely be considered as an engine of growth. However, in reality it’s not that simple to conclude. More than 150 years ago Friedrich List criticised the countries indulging in catering the need of raw material of the world. In such form of trade a typical depletion gradually erodes the raw material exporting countries and once left with no more natural resources, it is left to be doomed. Furthermore in such cases owing to over indulgence with extraction of minerals, other sectors seldom manage to flourish and that results in sectoral underdevelopment and bottleneck. This is what happened for the oil exporting countries of the Middle East and for African countries. (Brown, 1974) Quite a similar experience has been theoretically proven and empirically validated by Raul Prebisch and Hans Singer in their hypothesis concerning primary product exporting countries. They have shown that the terms of trade of the primary product exporting countries deteriorates over time against that of the secondary product exporting countries when they enter into a trade relation. This happens owing to the relatively sticky nature of the price of the primary product (inelastic demand) against that of the secondary product. Following this doctrine the income gap between primary product producing country and secondary product producing country will keep on widening and the much vowed catch up hypothesis of the proponents of international trade would be nothing short of a day dream. (Thirlwall, 2003; Ray, 2002) The cherished free movement of capital and labour following globalisation and international trade seems much grimmer than glorified if Gunnar Myrdal’s hypothesis of cumulative causation is considered. According to Myrdal in a free market mechanism one of the preconditions of free trade or international trade capital and labour moves from low opportunity area to high opportunity area. The developing and mainly the less developed countries are considered as low opportunity area and the developed nations as high opportunity area. If they enter into a trade relation embracing the free market mechanism, precious capital and labour might move from less developed and developing countries to developed countries thereby eroding the poor nation even to a greater degree. (Thirlwall, 2003) International trade of the present form is nothing but a form of free trade without any protection. The infant industry argument has put the abolition of protective measures against strong debate. The infant industry argument states that an indigenous industry in its nascent form should be protected and nourished with subsidies and other protective measures against any alien competition. This is only to provide it the necessary gestation period to be self-sufficient so that it can battle against the mainstream competition in the long run. It has been found that such protective measures are beneficial for the country in long run and necessary for the self-sufficiency in terms of industrialisation. Since the developed nations are already industrialised for long so they do not need such protective measures unlike the developing and less developed nations. If following the free trade doctrine all sort of protective barriers are abolished then the indigenous industry might get exposed to unequal foreign competition much earlier than expected and succumb to that. Furthermore the industries of developed nations are far more capital intensive with higher productivity and better technology, without the protection forwarded on behalf of the government the indigenous industries does not stand a chance against them. This doctrine of infant industry argument hits the very foundation of free trade. (Thirlwall, 2003; Ray, 2002) It has often been found that in case of trade between developed and developing or less developed nation economic development for the weaker partner often concentrates in a sector that is beneficial for the stronger partner. Adding to the agony, development of a particular sector seldom trickles down to other sectors of the economy. Furthermore the sudden development of an export-oriented sector has often risked or even destroyed the conventional sectors of the economy. A popular example of this sort of growth found in Netherlands is known as Dutch disease. (Batiz & Batiz, 1994) The dependency on unprecedented level of globalisation and international trade has already begot evil consequences for Argentina and Brazil. Economists like Frederic Mishkin believe that the Asian Financial Crisis was started following a lax policy of the government of the associated nations extended towards the financial institutions of the countries with a view to acquire more foreign investment. (Mishkin, 1999) These facts alarm against dependency on International trade to realize growth and development. A less developed country has many aspects to address apart from international trade. Basic infrastructure, indigenous industries, primary sectors and social variables are some of the parts that deserve higher importance and attention. The trade proceedings if used for the development of these sectors will deliver positive outcome for the long run. There are certain facts about international trade that cannot be overlooked even after considering its immense potential as a positive economic agent. It has been observed that developed countries that are most vocal against implementation of any kind of protection are overly indulged in extending the same to their different indigenous sectors. USA is known to extend one of the highest subsidies to their farmers. (Pitale, 2007) Moreover the research and development expenditure is far high in developed countries than in less developed and developing countries. (ISCA, 2003) This helps in improving quality and productivity and thereby guarantees higher quality product and lower cost leading to lower price of the product. Such a scenario might manage to lead to free trade but cannot assure fair trade. Apart from that the developed countries are far more advanced in terms of issuance of patent, packaging and logistic. Patent might be considered as anew machinery in the hand of economic imperialism. The awareness, opportunity and official facilities associated with patent are higher in developed countries especially in USA. (OECD, 2004) Once patent has been obtained on a certain product, production or trade on that product by others is illegal. In less developed and developing countries a high percentage of production gets destroyed owing to lack of logistic facilities. (Abele et al., 2008) This is very true for perishable products like food grains, and other food related products. At this juncture a free trade can bring catastrophic consequences to the indigenous producers and merchants of the less developed and developing countries. Conclusion Even after considering the aforesaid shortcomings of international trade, it is true that at present circumstances a country cannot abstain from participating in international trade. However a careful consideration of the circumstances by the concerned government is needed. IMF, World Bank and WTO the universally accepted agencies entrusted with globally embracing free market mechanism and boosting international trade have often been found to be catering to the goals of developed nations rather than maintaining a neutral role. Much more clarity and precision is needed in their action. On the other hand the governments of the developing and less developed nations have indulged in reaping short run gains associated with international trade rather than taking a calculative step towards it. As an example the national government of India has taken outsourcing as a means of employment creation and as a source of acquiring foreign fund. USA is its main trading partner as an agent of outsourcing; however any policy change regarding outsourcing on behalf of USA will expose the vulnerability of this model and will make millions of Indians jobless. International trade can really be beneficial for all the countries around world if it is lead in fair terms rather than free. A manageable level of protection should be considered to be fair for less developed nations unless they are capable of taking the brunt of the mainstream competition. Following this it is true that some countries should be protected from International trade not by abstaining from participating rather through moderate protectionist policies and that too for a moderate period of time. References Abele, E., Meyer, T. & U. Naher, (2008), Global Production, Spinger, London Agarwal, A.N. (2006), Indian Economy Problems Of Development And Planning, New Age International, New Delhi Berdell, J. 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