The Concept of Interdependence of Major World Economies - Essay Example

?Insert International Finance s The current world is marked by more interdependence of major world economies. This has been brought about by globalization. Today there the world is marked by more international trade and political relations, which in turn result in a more compound structure of the global markets. The closer linkage between and among global powers has precipitated more interdependence and better business opportunities among countries, but when economic crises strike more seriously than expected countries suffer economic losses, which sometimes cannot be solved by the International Financial Institutions (IFIs). IFIs have been in existence courtesy of political and economic interests. Faster economic integration, through the elimination of cross-border barriers between the member countries, raises the possibility the spread of economic crisis across the region in the event of a policy failure and the role of international financial institutions in future to alleviate the problem. This is especially true because IFIs have not acted fast or adequate enough to enable countries avoid or manage the impacts of financial crises (Marktanner and Salman 4479). The International Monetary Fund (IMF) and the World Bank are prominent IFIs, which provide financial services across the world. They were both set up at Bretton Woods in 1944 to control the post-war global economy. The establishment of IMF was inspired by the desire to manage the modalities of fixed exchange rates across states and to help nation-states ease budget shortfalls, while the World Bank’s scope at its inception was to enable nations achieve post-war reconstruction efforts. Since then, the roles of both institutions have changed significantly following a swift evolution of the scope and mandate of international economy. These international changes have sparked concerns relating to the significance of the two international financial institutions. Despite their significant role in the world, the increasing liberal financial services in the global market and unfair trading practices in some countries such as China have really led many to question the relevance of the two organizations. The Bretton Woods Convention was premised upon exchange rates based on the United States dollar, whose value was then shored up by gold reserves. Nonetheless, the United States’ stance on the balance of payments weakened drastically in the 1960s as a result of heavy military budgets and soaring inflation rates. As a result, the suspension of the United States convertibility to gold in early 1970s led to the disintegration of the monetary system agreed upon at Bretton Woods. And for four decades now, all nations have set up internal mechanism to guide exchange rates. These range from fixed currency exchange rates to controlled floats and liberal floating systems. Benefits of IFIs Despite the shortfalls, IFIs are advantageous because the credit risk often comes out in adverse cases. As a result, the establishment of IFIs to cater for the financial needs of governments cannot be rivalled by the private sector. IFIs offer financial services at highly reduced costs, and do not exert a lot of pressures upon the loaner. This means IFIs operate in an even-handed manner, without passing extra costs to the loaner (Marktanner and Salman 4482). As the economy is mostly forced to factor in the political effects, this risk is invisible in the operation of IFIs. These organizations represent the qualified source of finances and may provide financial services at, or below the market interest rate, this being allowed even in the scenarios where global capital market reigns. In the event that the global capital markets remain steadfast, the ensuing scenario often manifests in the missing certitude in loaning each country, which essentially takes place due to the essence of the management of the economy. The challenge that a government may not have the capacity to handle the duty service is much reduced in a national economy that has stable macroeconomic policies, where the financial policies are sufficient and the capital flows are properly utilized through meaningful investment. Additionally, IFIs loans private investments. This is a break away from the norms of private creditors. As a result, the IFIs dictate the spending of finances on specific projects for the sake of accountability. The low cost of offering financial services which are normally associated with IFIs credits could alter investment options from specific projects, however. Also, the political aspect of that project is influenced by credit alterations to suit the structure of investment, in the sense that other economies may also gain from credit. This is especially true for cross-border auctions for the important consumables. The control enables easier execution of the investment, by satisfying the benchmarks regarding the viability of the business environment. The Globalization challenge Most IFIs were established to enable developed economies such as the United States to manipulate the international capital flows through their capitalist policies, when the underdeveloped countries were not fully relying upon the support from developed partners. A key aspect of IFIs in the past decades was the growth of globalization and the increasingly integrated role of the capital markets. In the early 1980s, a bulge in the level of capital flows in the direction of emergent markets became more prominent, on the basis of managing the oil revenues. Yet this degenerated into the 1982 economic meltdown due to accumulated debts. After a lull of economic crisis and the development of stronger macroeconomic policies which yielded stability, the world economy registered a sharp rise in the capital flows in the early 1990s. This came at a time when many countries that sought to rely upon direct foreign investments and credit services from non-banking organizations, accounted for the primary source of finances for underdeveloped economies in the world. Given this new development since 2000, the IFIs credit facilities decreased in proportion on the global market to insignificant proportions of the entire capital flows, with about 40 per cent in use in 1990. This culminated in their significant role in the global economies (Marktanner and Salman 4485). In light of this, it can be argued that the IFIs portion evolves to become more and more biased as financial needs evolves in favour of the private sector and the developing financial integration. The rationale of the capitalist IFIs’ influence has led many economists to question contributions of the IFIs in the current world economy driven by globalization and the more proactive role of the private sector as an alternative avenue for financial services and economic growth. Multilateral losses The IFIs culture and mode of operation shows that said organizations were the key source of credit services for various governments in the world, in the 1980s throughout 1990s. Additionally they also played a significant role in the capital flows, which basically involved transferring resources from the more developed economies to the weaker ones. The IFIs customary structure was that of wooing finances from the global capital markets and provides governments with a ready lending option in case of financial shortages. The IFIs’ key aspect of capitalism is their multilateral approach to economic growth. As such occurring crises often have ramifications on all the stockholder economies. This represents a more serious problem than the previously-preferred bilateral approach to financial aid which basically affects only the two parties involved – creditor and loaner. In light of this, many countries feared that any slight changes in the financial systems could easily trickle down to hurt their own domestic economic interests and impair their contribution in the world. Corruption IFIs collapsed under widespread corruption in the 1980s, which embroiled internal staff and the recipients of the credits. For more than five decades IFIs did not do enough to rein in corrupt practices within its ranks and projects. Policies and activities turned out to be the opposite of issues directors of IFIs proclaimed to undertake. In developing countries that needed financial help, rampant corruption was the order of the day. The public sector became under attack and the whole idea of governance premised upon meritocracy was jettisoned. In parallel, IFIs collapsed under the pressure from white-collar crime targeting businesses. A collusive business culture executed for selfish interests became prominent in the economic quarters, as banking and credit facilities collapsed, humiliating almost all sectors of the economy and service industry. The effort by the private sector to tighten internal controls was equally met with corrupt practices. Today, however, IFIs have returned under better management and reduced corruption practices that have been achieved by the building of better anti-corruption structures in developing countries (Marktanner and Salman 4486). As a result, there are two important forces opposing each other which might not see the return of IFIs in full capacity in the near future, however. Corrupt practices have been pitted against anti-corruption measures, resulting in standoffs in various countries in the world, especially those that needed the financial services of IFIs. Owing to the deep history of corruption, and the challenging task of its eradication, IFIs found themselves in the middle of the crisis and had to assume a less active role as the costs of operation surpassed the value it was bringing upon world economies that needed its assistance. Liberal IFIs versus rule-based trade Reconciling liberal IFIs with rule-based trade by allowing different financial strategies is a challenging task that requires a delicate balancing act to succeed, since the interdependence between regional financial powers is technically impossible. The law which set up the General Agreement on Trade in Services (GATS) as the body in charge of the administration of rule-based trade fails to provide clear guidelines regarding how GATS should operate in such a scenario. Rather, the Convention briefly mentions its mandate, which is the administration of all measures implemented by the Members. The services must have an impact on the exchange of services in all the service sectors. The Convention is insufficient in encompassing in its general approach, what trade entails. GATS generally defines trade as the supply of a service through any of the following modes: Mode 1 focuses on the supply of a service across national territories, which is within the parameters of international trade in commodities, provided that a service passes the border of a country; for example, the mode is applicable in the transfer a credit to a foreign national or organization residing in who exists in another country. Mode 2 entails consumption of the services in a foreign country such as the consumer movement to the country carrying out the supply; for example, consumers may seek financial services while on a journey in a foreign country. Mode 3 is of high importance in the sense that it encompasses the existence of a supplier in a country that is a member state, for purposes of operating their businesses and providing the services needed. For example, when a foreign-owned financial institution such as a bank may sets up a subsidiary in the country and provides financial services to the locals. By including trade opportunities involving sales made by a commercial entity, the Convention technically encompasses foreign direct investment, which takes up a large proportion of all financial service dealings. Mode 4 involves the provision of services via existing natural persons. This can happen through autonomous financial specialists or financial institution executives from or in a Member state. Notably, certain GATS requirements are universally applicable, while others are based upon the sectoral commitments, which are implemented by individual countries under the convention. General rules Despite the largely laisser-faire approach to trade provided by the GATS, different IFIs enjoying the benefits brought about by the liberalised markets may have their operations reconciled by the general GATS rules and international law. The first major rule that can act to this effect is the general requirements regulation pertaining to transparency. The rule necessitates inter alia that each country that has domesticated GATS must regularly publish all the necessary rules of general application influencing a service-centred trade. Then there is the most-favoured-nation (MFN) rule which disbars Member countries from imposing unfair trading practices that might affect the operations of their partners. The Agreement, allows Members to publish temporary exceptions to MFN, however. In cases involving financial services, several MFN exceptions had been upheld when the initial round of deliberations were completed in mid-1990s, a number of which retained the powers to implement trade-off policies as a premise for allowing entry into the markets. One of the most important goals of the Agreement is to limit such exemptions and pressure countries to comply with MFN to the letter. The slackening impact of the GATS on the trade rules is premised upon the context and value of the commitments that must be adhered to in various sectors of the economy. The central laws of the GATS in the provision of financial services are premised upon access to the market and the government policies influencing its operations, which are clearly spelt out in Articles 16 and 17 respectively (Marktanner and Salman 4485). A possible attempt to reconcile the two bodies of laws may encounter hurdles since GATS provisions are only applicable in sectors clearly spelt out by the signatory countries in their respective agenda of commitments. Besides, Members may wish to establish internal controls within the general domesticated schedules. Despite the tremendous role played by GATS in merging IFIs across the world, it is worth noting that GATS is implemented as a guarantee, and in the event that the Convention is absent in a market environment, interested parties may still carry out the business in such markets. In fact, some countries have established more liberal market conditions than those complying with GATS. The provision regulating access to markets spells out the parameters within which market players should operate. These are: restrictions on the quantity of suppliers; restrictions on the maximum value of services; restrictions on the total quantity of service production; restrictions on the entire number of natural persons for employment; rules which limit or provide for specific categories of legal organizations; and restrictions on the involvement of foreign capital. In scheduled industries, the implementation of any of these regulations should be enforced in conformity to the four modes of supply. Article 17 of GATS provides for the roles of government in the service industries as treatment that is comparatively similar to other domestic players in the market. In contrast to the provisions of GATS, Members may establish internal rules on government treatment in their respective schedules, and in line with the four methods of supply. Overall, whereas international trade is carried out under universal rules, the IFIs’ business operations are influenced by acceptable economic traditions, memoranda of understanding, codes of conduct, and other diplomatic ties. IFIs Tolerance The 1980s and 1990s witnessed sharp rises in the value and quantity of financial flows across borders of nation-states following massive steps to liberalise national capital accounts and capital markets in an integrated manner. The tremendous and swift movements of financial services across nation-states and inherently poor financial systems, triggered many factors leading to financial crises. These include; the Latin American credit crunch of the 1980s, the Mexican crisis of the mid 1990s, the Asian economic meltdown in 1997, and Russian and Brazilian financial crises of 1998. In light of these crises, the role of IMF in alleviating the crises symbolizes the lack of faith in IFIs during the late 20th Century environment. In most of the cases, many economists criticized the institution for deploying fewer resources belatedly. As a consequence of the high level of volatility of international financial environment, the IMF has enforced new policies which are widely seen as a paradigm shift from its responses in the past century. The institution carries out more surveillance programs, which are aimed at preventing the crisis from recurring and deploying the best moves to ensure effective resolutions are properly achieved. Notably, whereas IMF’s strategy to support the development of effective banking and monetary systems across the world in the 21st Century has to do with tolerating alternative financial services, the move has been linked to lending moves that accompanied the behaviour of financial institutions in 1980s and 1990s (Marktanner and Salman 4484). Notably, the IMF may have deployed modest resources towards resolving the financial crises in a tacit move aimed sending a strong message to the liberal IFI market that they ought to have prevented the problem or at least acted to solve the financial problem. The future may not be merrier for IFIs, especially with the increasing cases of imbalances in foreign exchange moves. In the recent past, the increasing amount of foreign reserves in the custody of emerging powers such as China, have raised questions regarding whether the IFI’s mandate as the provider of financial services for crisis-stricken economies remains still holds any water. Indeed, the increasingly liberalized financial market, and the accumulation of heavy foreign reserves by a number of the countries in the world translates into widespread doubts over the capacity of IMF to deploy effective measures aimed at correcting a threateningly serious financial crisis in future. Question # 2 Oil and US foreign policy Access to oilfields in foreign countries first came up in the American foreign policy after World War I, and again after the World War II due to the increasing significance of petroleum in contemporary industries and modern military operations. The fear of depletion of the country’s local reserves and the importance of using American multinational oil companies to source for additional crude oil also inspired the change in foreign policy toward an oil-based one. Although, the American oil industry quickly developed following the exploration of new oil fields locally, boosting the prominence of American oil companies in other countries was key to enabling the country to have sufficient oil supply for foreign consumers. The foreign oil was often seen as less costly to produce and deliver; therefore, it enhanced the particular companies’ gains, and eased the potential threat to exhaustion of United States reserves (Painter 24). The move was a clever one to avoid being perceived as controlling some spheres elsewhere in the world for the sake of oil production, a tag that would have been hard to shrug off had such facilities been in the hands of the government. The United States’ insistence on the ‘liberal’ policy to oil exploration also enabled the country to have more political influence elsewhere in the world. President Truman’s government also tried, during the post-war America, to find a solution to the potential problem of oil insecurity by embarking on a large-scale initiative aimed at producing synthetic fuels locally. The production of synthetic fuels was costly, in that a substantial quantity of steel would be spent, besides generating higher volumes of wastes than production of gasoline fuels. Although the program emerged as one that would uplift the struggling coal industry, petroleum industry was opposed to the setting up of competition that would cost tax payers more money. As a result, the Eisenhower government abandoned the production of artificial fuels in 1954 for fossil fuels. Faced with the traditional fears of oil shortage, the United States responded by venturing in the Middle East. Iranian oil sector was the platform for the US government to highlight the major elements of an oil-based foreign policy. The US rejected the effort to achieve economic nationalism in Iran, by sponsoring activism in the country in an effort to maintain the consolidation of Western influence in the Middle East region. Both Washington and the American oil multinationals had significant gains to achieve: whereas the interest of the companies was to have a foot in rich foreign oil fields and benefit from the high market demand for petroleum products in the region, the United States government was keen on stocking its oil reserves and achieving political influence in the region. In spite the passage of time, oil continues to be a significant part of the US foreign policy. Perhaps, the only difference in the foreign oil fields is that countries have nationalized the resources and are keen on exploiting them to achieve national goals. As a result, the American foreign multinationals today have a narrower mandate as far as the exploitation of the oil is concerned. Changing trends of oil-based foreign policy Oil resources and their use in the Middle East countries continue to be a major concern for American foreign policy makers. Despite the presence of peace in the better part of the world, most of countries producing oil have had a lot of wars to fight, with the United States playing either a direct role or acting indirectly to tilt the outcome in favour of its economic and political policies. Unlike the American foreign policy of the 1950s aimed at directly restocking its oil reserves, the United States is today tailoring her foreign policy to handle the negative spillages from of the oil producing countries. Oil wealth continues to cause problems to the producing states, enabling extremist terror elements to finance their movements against political establishment, and exacerbates ethnic hostilities. Today’s oil-producing economies increasingly join the growing percentage of the conflict-prone states in the world, with some opting to use petroleum products to make lethal weapons. The oil-producing countries comprise an estimated one-third of the cases of civil unrest in the world. These hostilities have been deemed by American policy makers as dangerous to various US interests across the world hence the need for the country’s firm stance against such countries. The United States-led military attacks on Iraq in 1991 and 2003 are typical examples of America’s firm foreign policy in the Middle East to clean up the perceived presence of dangerous weapons - one of the awful impacts of oil production. The US also set her hand upon the country’s vast oil resources. Aside from the Iraq issue, the number of conflicts in oil-producing countries is expected to increase in future as the cost of crude oil increases and oil products are channelled towards other non-peaceful causes. In 2001, the American government welcomed the growth of new oil producers as an opportunity for the country to explore other sources of its fuel imports and ease its dependence on the Persian Gulf’s crude oil. More than ten countries in Africa and Southeast Asia have recently discovered oilfields, and in the near future, they will become sources of oil. A number of these states including Chad, Myanmar, and East Timor are recovering from social and political instability. Additionally, most of the expected producers have weak democratic structures, a condition that may degenerate into conflict. Moreover, high pump prices will culminate in the heavy economic windfalls whose returns may not be properly distributed properly in those countries, as they have weak governance structures. In light of this, the United States is expected to maintain tough policies aimed at restoring order and avert a possible spill-over of oil that may hurt its interests abroad (Painter 31). Geopolitics versus economic governance Whereas geopolitics plays an important role in dictating the exploration and sale of oil in the world, the commodity’s prices depend highly on global economics. In an environment where the oil economy is tightly controlled by state oil firms, issue of mandate often crop up, and, in such contexts, geopolitics pays an important role. Nonetheless, it is just a slight role, subsidiary to the basic economic elements of the world economy. The growth of energy consumption and demand for products of oil, coupled with the lack of adequate surplus capacity has transformed the world into a totally different environment of petroleum economy. This has resulted in more demand across the world, particularly within the American society due to its highly mechanized economy. Economic issues have relegated geopolitics to a lesser prominent status in deciphering the current global oil economy. Today’s oil shortages have placed key world economies in a difficult position as far as finding adequate solutions are concerned. Past oil crises were easier to treat as compared to current situation. Back in 1970s, for example, the crisis entailed issues about the sufficiency of the global economy’s supply since adequate reserve capacity was partly blamed on and could be solved by political leaders. It is notable that demand and supply issues transform oil pressures and are more understandable economically than prior crises with political origins. However, in the event that the permanent contours of economic growth in the world result in a grave depletion of supply strength and unexpended demands for oil products, geopolitical governance may well resurface. In such a scenario, emerging economic powers would be forced to vie for costlier petroleum supplies, primarily because their petroleum industries are controlled by government. Government’s ever-evolving spheres of control regarding the oil market are tightly enforced by many oil producing countries. The increasing government control of oil drilling and supply is generally associated with a permanent adjustment of oil prices to higher levels (Williams 68). But the nationalism policies now have yielded stable, well-organized petroleum management sectors. The petroleum economy’s concessionaires have reduced drastically, while the US government-led production efforts in other oil producing countries have had limited capacity, subject to state control. The implementation of government oil policy may have some unintended consequences, because reversion of former public-run companies into the private hands has led to tremendous growth of the global economy. But now, the very fruitful returns of global economic growth are to blame for the ever-increasing oil prices. Additionally, encouraging petroleum revenues have generally barred oil economies that control oil production and sale from achieving a turnaround of the economy. The black gold has indeed shaded the fortunes of both producers and consumers in equal measure due to geopolitical policies. For producers, oil has resulted in the postponement of privatization and an entirely blossoming economy led by the private sector and based on accumulation of human resources. For users, oil has resulted in tremendous political pressure to maintain the pump prices reasonable, thereby eliminating the bulk of the motivation to introduce alternative fuels other than gasoline. The powerful concept of market economy has played a key role in limiting the government involvement in a number of private-run countries, although the government is often expected to take the initiative to correct extreme oil prices. Notably, market economies have witnessed a reduction in free-market areas for fuels following an increase in government control. This is especially true, considering the fact that most governments that preside over oil production will not likely abandon the valuable resource for the private sector merely because there is need for higher efficiency and economic growth. This renders market-based policies largely ineffective, because the political leadership wish to maintain a good public image. It also implies that for petroleum prices to come down, they must go up first. In conclusion, economic governance is expected to take precedence as opposed to geopolitical political because the obtainability of crude oil to the consumers across the world is more important than the person or party who calls the shots at the oilfields and or production facilities. In a competitive market of crude oil, economic pointers such as demand and supply will dictate the market trends and the level of production and sale to avoid imbalances in the market. In the market, wherever the oil product comes from does not matter a lot, what matters is availability in adequate amounts for use by consumers. Works Cited Marktanner, Marcus, and Salman, Lana. Economic and geopolitical dimensions of renewable vs. nuclear energy in North Africa. Energy Policy, 39.8 (2011): 4479-4489. Painter, David S. Oil and the American Century. Journal of American History, 99.1 (2012): 24- 39. Williams, Christopher, and Martinez, Candace A. Government Effectiveness, the Global Financial Crisis, and Multinational Enterprise Internationalization. Journal of International Marketing, 20.3 (2012): 65-78. Read More