The Main Features of International Economy - Essay Example

The International Economy Topic Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutot’s Name 27th April 2013 Introduction In the 1970s debtor countries and exporters of raw materials sought to establish a New International Economic Order (NIEO). At this time, there were mounting crisis in the global economy. These crisis affected production, trade, prices, capital and cash flows. The functions of the main international institutions and markets were affected as well. NIEO was established in replacement of the then international economic order that was filled with self interest, dependence and self interests. Some of the institutions that were established to constitute NEIO were the “International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) and the General Agreement on Tariffs and Trade (GATT)” (Hudson, 2003, p. 1). The aim of NIEO was to oversee the restructuring of the process of international trade and flow of technology and capital. This step was necessary in ensuring that the benefits realized from international trade are equitably distributed to the developing nations (Hudson, 2003, p. 1). However, the institutions that were set up to regulate this new international economic order failed to prevent the Global Financial Crisis of 2007-8. The aim of this paper is to identify and analyse the main features of NIEO that were established after World War Two. The paper also aims to establish why the institutions that were mandated with regulating the new international economic order failed to achieve their goal (Claessens, et al., 2010, p. 270). NIEO advocated for a non-Communist approach to develop the terms of trade. These terms would enhance the presence of raw materials, agricultural and industrial operations. This approach would enhance self-sufficiency in order to reduce dependency on foreign trade and to reduce foreign debt trap. This was in line with most European and American nations that have always supported capitalistic approach. In order to achieve this self sufficiency, NIEO had to ensure that the developing countries were independent enough as to produce and rely on their resources. This would reduce on the developed countries as well as the overall debt burden. NIEO practiced values of equity, sovereign equality, interdependence, common interest and cooperation within all states despite their social and economic systems. Therefore, the new order would enable the developing nations to be recognized in the international economic decision making. This is because the economic events after the World War II necessitated full and equal involvement of the developing countries in international decision making process. However, the old order lacked features that could enable even and equal participations of developing countries in international decision making. Therefore, NIEO’s features of equity and equality would enhance international economic cooperation as a means of achieving speedy social and economic development (Zeff, 1978). NIEO’s aim was to achieve self-reliance by addressing the issues of imbalance that existed between the developed and developing countries. In order to achieve this objective, NIEO was expected to practice valuable influence over the natural resources. It was also expected to practice regulation of the actions of international corporations and to change the dominion of development finance. NIEO was also expected to improve access of the developing countries’ products to international markets. These factors would create self reliance and ensure that there is less wastage of natural resources so that they can be concentrated on development. NIEO was bestowed upon different rules and principles meant to govern relations of international economic operations. This meant that NIEO could manage technology, finance and flows of trade. One of the rules was to establish structural change in the operations of the international economy in order to enhance the operations of the developing countries. Therefore, the economic progress of the developing countries would not be dependent on the operations of the developed countries. NIEO was also required to adopt deliberate and active policies that would eradicate the level of dependence of the developing countries on the developed ones. This would reduce imbalance in bargaining strength as well. This meant that the developing countries would have a chance to establish their national priorities and exploit their resources in their own capacities (Dadzie, 1982, p. 3-5). NIEO was meant to create a restructured system. This system was based on cooperation between the developed and the developing nations. Therefore, the institution would create a common heritage of the available resources. NIEO also advocated for peace and prosperity. Peaceful coexistence among all the nations would bring universal development. Therefore, instating NIEO would be essential for realization of peace and security across the globe. To achieve universal development, NIEO was expected to ensure sufficient transfer of technology to the developing nations. It would also discourage Brain-Drain by ensuring that young intellectuals and professionals have access to employment opportunities. This goal would be attained by decentralizing markets in order to ensure that developing countries have equal opportunities for utilizing resources same as the developed countries (Panda, 2012, p. 1). Another feature of NIEO is the ability to establish more suitable conditions of trade for the developing nations. In order to achieve this, the new economic order was expected to establish economic and technological cooperation between the developed and the developing countries (Panda, 2012, p. 1). NIEO was also established in order to influence an integrated world economy. This economy was expected to thrive against the market forces. In order to achieve this goal, several rules were written down in the statutes of the global economic institutions that were established after World War II. The success of these institutions was dependent on the leadership of the United States and the acceptance of that leadership by other major countries (Fred, 1976). Why did the institutions which were set up to regulate this new international economic order fail to prevent the Global Financial Crisis of 2007-8? The financial crisis that hit the economy in 2007 and 2008 symbolised a turning point in the history of capitalism. It was one of the most serious economic and social crisis ever witnessed since 1929. Inflation remained high resulting to rise in international food prices. This resulted to reduced purchasing power especially among the poor families in the developing nations. The number of undernourished people in the globe rose by 11 per cent by 2009. However, the main concern is why the institutions that had been set-up to regulate new international economic order failed to prevent this crisis (Pereira, 2012, p. 3). Institutions such as the international economic cooperation have failed to beat the world economic crisis and to establish an effective international development process. In particular, the cooperation has failed to achieve some of the objectives it had placed on the New International Economic Order. For example, sectors such as money, finance and improved power of exports of the developing countries are still unaddressed. As a result, most developing countries continue to be at an economic disadvantage (Modigliani & Merton, l958). Deregulation that was conducted by some institutions such as the US Federal Reserve Bank also caused the economic crisis. This is because the bank’s monetary policy kept interest rates low for a very long period of time. This caused massive increase in the credit supply that was necessary in producing high levels of leverage. High account surpluses in developing countries weakened the US dollar making such countries to increase their debt levels. The higher leverage that these countries accumulated, the more serious the financial crisis would impact them. Poor deregulation caused subprime crisis. Subprime crisis arose from mortgages and credit facilities that were offered to subprime borrowers. Poor credit analysis of these borrowers led to high levels of loan and mortgage defaulters (Brunnermeier et al., 2009, p. 15). Adoption of irrelevant company acts and uncontrolled building society legislations also contributed to the global financial crisis encountered in 2007 to 2008. For example, the fall of Northern Rock building society came about as a result of liberalization of the building societies’ legislation. This is because there was insufficient control placed when the building society was being converted into a listed company. For a long period of time, the building societies’ lending facilities were very attractive to borrowers because they were prone to less deposit risks as compared to commercial banks. The legislation of the credit facilities ensured that any surplus generated from their activities was preserved for future home buyers . Additionally, the societies’ shareholders could not access the surplus funds until the deregulatory legislation was passed in 1986. The fact that they could accumulate huge surplus enabled the societies to easily make deposits to become members of listed companies. This move would mount more pressure on them to convert into commercial banks (Klein & Zur, 2009, p. 187). The case of Northern Rock revealed that the deregulation legislation failed to foresee the impending danger of the society’s insufficient reserves. Insufficient reserves made it impossible for Northern Rock to deal with the 2007 act of freezing up the inter-bank credit market. With poor legislations in place, institutions that were meant to prevent the global financial crisis failed to work effectively (Rashma, 2012, p. 1). Uncontrolled corporate governance norms and structures also contributed to the global crisis witnessed in 2007 and 2008. For example, Lehmann Brothers financial scandal revealed that many corporations were using SPVs to inflate their earnings in the final months. Additionally, evidence revealed that managerial incentives were distorted towards the short term because the executives were facing pressure from the directors to retain high share prices by all means necessary. Some of the strategies that were used to achieve this were habitual restructurings, exaggerated leverages and engagement in mergers and acquisition activities. This made most of the institutions to use most of their funds in their balance sheets to cater for inflated share prices. The figures rose to uncontrollable figures in 2007 and 2008 therefore affecting the operations of many organizations and leading to their eventual collapse. Therefore, poor control over the powers and authority bestowed upon executive decisions made the operations of institutions that were established to prevent the global economic crisis to fail (Deakin, 2010). Poor capital regulation made financial institutions to exaggerate their leverage while at the same retaining their capital requirement levels. This was achieved by moving assets off the balance sheers into vehicles meant for special use. These were vehicles that were subject to weaker capital standards. The same vehicles were used in risky and illiquid investments such as mortgages. These investments were funded in wholesale markets with inadequate capital. Therefore, this banking system was being supported by short term funding in addition to tax regulations omission. This resulted to influx in asset prices and subsequent rise in home prices and debts. The account of poor capital regulation made the institutions that were established to prevent the economic crisis to fail to work (Laeven & Valencia, 2012, p. 2). Normative change in the assessment of capital controls and change in policies governing various institutions also led to the global crisis of 2007 and 2008. After the World War II, capital controls were considered ‘natural’ and ‘good’. However, during the 1990s’ age of global capital, these controls and policies started to be considered as unusual and wrong. In order to achieve reduced capital controls, various things had to be changed. For example, the EU policy, OECD’s Codes of Liberalisation and IMF’s Articles of Agreement were either completely changed or amended. One of the countries that supported reduced capital control was France. This is because the country felt that capital controls caused constrains to the middle class. Additionally, France felt that social equality would be achieved by eradicating the controls (Marglin & Juliet, 1990). However, change in the policy ideas of the institutions such as IMF and EU increased loopholes in operations of most of the financial institutions in Europe and America. Therefore, reduced capital controls were partly to blame for the global economic crisis of 2007 and 2008. They are also responsible for the failure of the institutions that were given the responsibility of preventing the crisis (Buthe, 2008, p. 2). Conclusion A New International Economic Order (NIEO) was established in the 1970s in order to bring economic equality between the developed and developing countries. The institutions that constituted NIEO were mandated with the responsibility of preventing the global economic crisis of 2007 and 2008. These financial institutions included the International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) and the General Agreement on Tariffs and Trade (GATT). The main features of NIEO were: it had a non-Communist approach towards development of the terms of trade, it practiced equity, sovereign equality, interdependence, common interest and cooperation, it influenced self-reliance, it bestowed upon different rules and principles meant to govern relations of international economic operations, it created a restructured system and it influenced an integrated world economy. However, the institutions that were mandated with the responsibility of preventing the global economic crisis of 2007-2008 failed. Some of the reasons why they failed were: deregulation that was conducted by some institutions such as the US Federal Reserve Bank, adoption of irrelevant company acts and uncontrolled building society legislations, uncontrolled corporate governance norms and structures, poor capital and normative change in the assessment of capital controls and change in policies governing various financial institutions. References Brunnermeier, M, Crocket, A, Goodhart, C, Hellwig, M, Persaud, A, & Shin, H. (2009). The Fundamental Principles of Financial Regulation. Retrieved from http://chifl.shufe.edu.cn/upload/htmleditor/File/120504104008.pdf Buthe, T. (2008). Politics and Institutions in the Regulation of Global Capital: A Review Article. Review of International Organizations, 3(2), 207-220. Claessens, S, Dell’Ariccia, G, Igan, D & Laeven, L. (2010). 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