Internationization Of Economies - Essay Example

?Internationalization of Economies Using your knowledge and understanding of economic theory, discuss some advantages and some risks of globalization. Assess the arguments for and against floating exchange rates, and the arguments for and against fixed exchange rate. Explain what a Monetary Union is and indicate possible benefits of the regime. Globalisation is a broad term used to denote the merger of the world’s various economic systems. The primary agents of change are reductions in barriers to trade such as import quotas, export fees and tariffs. The base contention related to justify globalisation is that it aids in increasing material wealth as well as goods and services through an efficient process of international division of labour. Globalisation is also used to describe how regional economies, cultures and societies are becoming increasingly integrated through trade, transportation and communication. Economic globalisation can be specified better if seen as the integration of national and regional economies into the global economy. The salient features of this integration are FDI (foreign direct investment), migration, trade, capital flows, technology and military presence. (Bhagwati, 2004) Globalisation like most other international phenomenon has had positive and negative consequences. This text will attempt to analyse the positive and negative aspects of globalisation in terms of economics by utilising relevant economic theories. This will be followed by a discussion on floating and fixed exchange rates and the text will end with an appraisal of the monetary union concept. Economic Globalisation Economic globalisation is dependent on achieving a common global market that is based entirely on the freedom to exchange all nature of services and goods. (Lorenz & Wagner, 2007) Another major consequence of globalisation is that employees have to compete in an international job market. Previously wage regulations were more in sync with national economies while the advent of globalisation has changed this altogether. As economies are more and more intertwined, the failure of an individual economy does not necessarily jeopardise worker’s wages. This has affected the distribution of wages and income on a large scale. (Reich, 1992) The new global market is highly competitive and productivity must be upgraded in order to face the competition. The removal of trade barriers and tariffs ensures that competition is head on and multi faceted simultaneously. Quality and cost need to be monitored at the same time and there are large chances that industry may fail if faced with too stiff competition. Industries must upgrade their technology as well as the product range in order to compete. (Croucher, 2004) However, the failure of individual economies does present the chance for a domino effect. One failing economy may spur failure elsewhere and the entire global market may collapse. The recent economic recession is a glaring example of such a phenomenon. Some schools of thought contend that globalisation does present obvious problems through rapid development but globalisation is a positive force which has the power to lift a nation out of poverty. Rapid development spurs a virtual economic cycle which produces faster economic advancement. (Bhagwati, 2004) Globalisation presents blue collar workers in developing nations with far greater occupational choices than before. Educated workers from developing nations are given chances to compete internationally for better paying jobs. Workers from developing nations are able to compete with workers from industrialised nations at an advantage. This aids in creating greater opportunities for workers. Workers are provided with opportunities to emigrate and getting jobs in industrialised countries or to stay in their native countries to work in outsourced industrial ventures. The global economy also provides abundant opportunities for products of cottage industries too. (Bhagwati, 2004) On the other hand, globalisation has come under intense pressure due to opposition. The detractors of globalisation hold that it has produced greater inequality and has promoted environmentally degrading practices. As an example, the Midwest of the United States has suffered at the hands of globalisation as its industry and agriculture waned which in turn led to a lowered quality of life. (Longworth, 2007) The effects of globalisation on culture are considered highly negative too. Globalisation of trade and economy is aiding in the movement of cultural values too. The overriding concern is that the cultures of more dominant countries such as the United States will eventually take over the cultures of smaller countries especially from the Third World. The erosion of local customs and cultural values will have a direct impact on the economies of nations too. (Steger, 2009) Effects of Globalisation on Jobs Promotion of Income Inequality The trend of globalisation has had negative consequences for workers in developing countries. White collar workers are able to compete within international job markets and take high wages. On the other hand, blue collar workers within industrialised nations cannot compete with blue collar workers in Third World nations. (Reich, 1992) Globalisation is often implemented in such a form that the low value work addition is outsourced but the high value addition work is done within the First World countries. For example, electronics production is done in Third World countries but their management and sales functions are retained by major corporations in the First World. Consequently, the income disparity between rich and poorer nations is growing by leaps and bounds. (Noah, 2010) Brain Drain Higher value addition workers from the poorer nations often immigrate to First World countries because of better pay offs and higher standards of living. The country investing on these people for decades is often left in the lurch as professionals within those nations become scarce. India for example has experienced $10 billion annually in brain drain through the foreign employment of professionals. (IANS, 2009) Sweat Shops Poorer nations are often host to miserable working conditions including cramped quarters and long working hours with little compensation. These sweat shops are rampantly established throughout the Third World and developing countries in order to remain economically competitive in the international market. Exchange Rate In financial terms, exchange rate is the rate at which one currency gets exchanged for another currency. Exchange rate is also known as foreign exchange rate or simply as forex rate. The valuation of one country’s currency in terms of another country’s currency is also regarded as the exchange rate. (O'Sullivan & Sheffrin, 2003) For example, the interbank exchange rate of 1.2 United States dollars to the Australian dollar means that 1.2 United States dollars will be exchanged for one Australian dollar. From a country’s perspective, the exchange rate denotes the total valuation of the imports and exports of the country. Moreover a country’s financial position in the international markets is also roughly assessed based on the applicable exchange rate. Exchange rates between currencies could be fixed or variable and both systems offer distinct advantages and disadvantages in comparison to each other. If a currency is allowed to float freely it means that its exchange rate is allowed to vary in respect to other currencies in the global market. The exchange rate is determined through market oriented supply and demand factors alone. Such currencies experience exchange rates that change nearly constantly as per their being quoted by financial institutions around the globe. In comparison, a fixed exchange rate is accompanied by provisions for devaluating a currency. Currency within a fixed exchange rate system is pegged to the value of another currency or often to gold. These systems are also known as moveable or peg adjusted systems. A lucid example stems from the Chinese policy of pegging the Chinese yuan to the United States dollar between 1994 and 2005. The Chinese yuan was exchanged at 8.28 RMB to one United States dollar for this entire period. Critique on Floating Exchange Rate Certain economists hold that floating exchange rates are preferable as they adjust automatically. This enables countries to reduce the consequences of economic shocks and foreign business cycles. The possibility for a balance of payment crisis can also be easily avoided. However, a floating exchange rate does not offer the stability and certainty of a fixed exchange rate system. However, this may not always be true considering countries that have attempted to keep their exchange rates artificially high. Relevant example are offered by the United Kingdom and certain South East Asian countries especially prior to the Asian currency crisis. Most currencies in the contemporary global financial market are floating. Most nations employ central banks to manage the float by demarcating an upper and lower float limit. Another major disadvantage associated to floating exchange rates is the fear of floating. Problems emerging from floating exchange rates are more likely to affect emerging economies than developed economies because they have: high liability in terms of the dollar; are financially fragile; pervasive consequences due to balance sheet effects. This can be understood better given that liabilities are often denominated in terms of foreign currencies while the assets are denominated in local currencies. Any unanticipated depreciations of exchange rates forces the deterioration of balance sheets. This often tends to destabilise the local financial system. (Calvo & Reinhart, 2000) Countries that have experienced fear of floating have increased in numbers especially during the nineties. (Levy-Yeyati & Sturzenegger, 2004) Critique on Fixed Exchange Rate Generally fixed exchange rates are utilised to stabilise the relative value of one currency against another. Overall this facilitates trade between two countries as exchange rates are far more predictable. Smaller economies with dominant external trade flows gain the most benefit out of fixed exchange rates. Moreover, a fixed exchange rate system can be used to limit inflation. On the other hand, if the referenced currency falls so does the subject currency. Moreover, governments are prevented from utilising the exchange rate to achieve macroeconomic stability. The greatest discredit to the fixed exchange rate system is that a flexible exchange rate aids in adjusting the balance of trade while a fixed exchange rate does not. (Suranovic, 2008) In case that a trade deficit occurs, the demand for foreign currency will rise which will force the exchange rate to inflate. Consequently, the price of foreign goods will become less attractive to the domestic market and the trade deficit will be pushed down. However, a fixed exchange rate system will not allow an automated rebalancing to take place. Another problem within the fixed exchange rate system is that governments will need to invest a lot of resources in order to pile up foreign currency so as to stabilise the exchange rate. This prevents the government from being free handed in manipulating fiscal policies. For example, if a government chooses to re-inflate the economy by introducing greater liquidity it may run into another trade deficit. Greater liquidity would bolster the purchasing power of the masses and would fuel inflation. This would make imports cheaper and the trade balance would take on a negative course. (Caramazza & Aziz, 1998) If a government chooses to defend the fixed exchange rate system while in a trade deficit, it might be forced to utilise deflationary measures. These measures could include excessive taxation and reducing available monetary resources. This in turn fuels unemployment and may lead to unrest. On another note, a country with a fixed exchange rate can retaliate against another country with a fixed exchange rate in order to shore their exchange rate. The ensuing struggle may prove to be detrimental to either economy in the shorter and longer run. As a consequence most countries have turned to the floating exchange system. (Goodman, 2005) Monetary Union A monetary union is formed when two or more nations begin to share a common currency platform. This is often followed by an integration of the economic systems and the formation of a singular market. Generally three major kinds of currency unions are recognised: informal: unilateral implementation of a foreign currency; formal: implementation of a foreign currency through bilateral or multilateral agreements; formal along with a common policy: implementation of a common currency by multiple nations along with a common monetary policy as well as a common authority for issuing a common currency. Monetary unions offer the participating countries various advantages such as freedom of movement between partners, ease of manipulating common currency and elimination of monopolies. Freedom of Movement between Partners When two or more nations are involved in a monetary union, the manufacturers and traders on all sides are free to move within the common market framework. The ease of movement between markets means that the best products rise to the top and are accessible to all partners within a monetary union. This is turn helps to increase the quality and lower the costs of products as competition is across the board rather than within geographical boundaries. Easier Manipulation of Common Currency Using a common currency system ensures that troublesome details with converting currencies and building up large reserves of foreign currencies is not a problem anymore. This in turn provides the common market system to implement fiscal policies with far greater ease. The pressure on balance sheets is lowered as well because destabilising effects of exchange rates are excluded altogether. Moreover, the need for independent currency conversion businesses is not felt. This in turn helps the business functions to lower costs although by small margins and increase profitability. Elimination of Monopolies The creation of a single market means that competition floats across the board. The ease of creating and garnering monopolies is reduced though not eliminated. Moreover, the creation of a broad based competitive single market ensures that products are both priced as low as possible and that quality is as high as possible. Thus products are cheaper and only the most competitive producers live up to the increased competition. (Saxena, 2011) Bibliography Bhagwati, J., 2004. In Defense of Globalization. New York: Oxford University Press. Calvo, G. & Reinhart, C., 2000. Fear of Floating. Quarterly Journal of Economics, 117, pp.379-408. 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[Online] Available at: HYPERLINK "http://ideas.repec.org/p/wpa/wuwpif/0508001.html" http://ideas.repec.org/p/wpa/wuwpif/0508001.html [Accessed 8 August 2011]. Steger, M., 2009. Globalization. New York: Sterling Publishing. Suranovic, S., 2008. International Finance Theory and Policy. Palgrave Macmillan. Read More