Understanding the International Economy - Essay Example

Understanding the International Economy TABLE OF CONTENTS Introduction 2 The Interdependent Global World 3 The Old/New Economic Order 13 Macroeconomics 14 Conclusion 16 References 18 Introduction In delving the subject of “Understanding the International Economy” Hirst et al (2009, Pp. 1-4) in their book “Globalization in Question” broached the question of globalization by asking if it is “… a necessary myth”. They brought forth that it is an often-used word, globalisation, used in social science to explain, describe and refer to a broad range of international, business, management and other disciplines (Hirst et al, 2009, Pp. 1-4). At the heart of their argument is the recent spread of interlinked economic ties between countries as heightened by a loosening of border restrictions as well as the Internet that has brought accessibility in terms of product availability and knowledge to consumers that did not exist in the early 1990s for the public at large. The increased sales and offering of services across national boundaries has intensified activity in the banking arena in terms of business to business transactions brought forth by the flow of funds in importation, export, direct sales and other exchanges that has called for increased banking interaction to finance these types of activities (Blount, 2003, P. 15). As a result of heightened banking activities and risk the increased financial flows between countries from all quarters has seen the International Bank for Settlements out of Geneva, Switzerland make adaptations to the Basel Accords via Basel II that has set forth new capital adequacy standards for European as well as large banks in the United States and Asia (Kashyap and Stein, 2004, P. 11). The implications of the foregoing are found in the central word of the subject of this study ‘economics’. It, economics, is defined as “The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems” (Houghton Mifflin, 2009a). The lubricant that enables the operation of the foregoing is banking. Finance represents the means for business to accomplish its objectives, with economics including national objectives. Governments and international organisations look to foster a climate that aids business in being competitive domestically, and internationally as a result of fiscal, interest rate, employment, tax, and other policies that guard resources and engender increased trade (Insight on the New, 2004, P. 34-36). Hirst et al (2009, P. 1) brought forth this point by stating that their work has mixtures of “… skepticism about global economic processes and optimism about possibilities of control of the international economy and about the viability of national political strategies”. In understanding the international economy, there are wide reaching implications as well as influences that impact upon it in what is less than a perfect world. This point is was also brought out by Hirst et al (2009, P. 2) in that in the face of the interconnected nature of national and business interests, there are no international models guiding the complex web of activities overall. The recent sub prime crisis that began in the United States and spread globally through credit default derivatives as a means to lay off risk is a contemporary example of the interconnected nature of the international economy (BBC News, 2007). Advances in technology and communications have created a world whereby financial and business transactions take place instantly, tying companies and national economies together through stock markets, trade and banking institutions (BBC News, 2007). The lack of what Hirst et al (2009, P. 2) termed as a foundational set of operational rules and policies is illustrated by the foregoing and in other instances entailed the failure of major companies as well as recent developments in corporate and banking frauds. The fast moving pace of business and international loopholes in rules, regulations and laws has been an outgrow of the lack of uniform legal processes governing international economies as defined by trade, banking, policies and related areas. The foregoing thus provides insight as to the complexity of the issue of the international economy that shall be explored herein The Interdependent Global World While this examination represents a contemporary topic, its foundations and roots with regard to an international economy is not a new development as the globe has increasing become more interconnected since the end of the Second World War. The isolationist policies that divided Europe, the Americas and Asia changed with the formation of the United Nations (Henderson, 1999, P. 10). However the true roots of the present global economy can be traced back to the early 1800s and the Industrial Revolution as new manufacturing processes increased productivity and the need for raw materials as well as fostering changes in lowered costs that meant more items were now available for consumption and trade (Alam, 2003, P. 3). The loss of sovereignty in mineral rich African and Asian nations was an offshoot of the new global economics as the spice trade, gold, sugar and other commodities represented another context, along with the build up of military power (Alam, 2003, P. 3). Increased trade as well as the production of products added to the ties, beginning in the 1800s, between countries in terms of the sales and importation of raw materials and production, with Hirst et al (2009, P. 2) stating that in some regards that the present global economy as a result of trade barriers, tariffs and other factors is less open than it was in the 1860s. The present international economic environment includes a strong presence by governments in terms of policies that impact trade, technology, labor and capital migration as well as the environment (Molle, 2003, Pp. 20-22). The advancements in the industrialized countries with respect to manufacturing, financial systems, interrelated trading and commerce ties, that in Europe was started with colonial expansion, has seen the world move toward its present stage of developed, developing and underdeveloped countries, where capital access, banking and international ties have played a major role in positioning (Thomas, 2007, P. 15). The dominance exhibited in the 1800 and early part of the 1900s has increased to the point where the global economic system is imbalanced in terms of its use as well as distribution (Cassara, 2007): Figure 1 - Global Consumption / 2004 (In Billions USD) (Cassara, 2007) Figure 2 – Trends in the Consumption of Selected Commodities (Cassara, 2007) The trending is changing as developing countries are making gains in trade as a result of foreign direct investment, increased intervention of their governments, along with regional trading blocks (people.hofstra.edu, 2008): Figure 3 – Global Trade Flows (people.hofstra.edu, 2008) Increased development on the part of lesser-developed countries in South America, Southwest Asia as well as East Asia account for the changes, with cheaper labour representing a substantial part of the shift (people.hofstra.edu, 2008). The Developed countries companies need for raw materials and labour, along with favourable tax advantages is also a part of the reasons for shifting monetary investments that have and are benefiting developing countries to a degree. The preceding guarded statement is made as a result of developed country forms, systems, policies and processes holding control over financial resources and the ability to determine, by and large, the extent of the arrangements reached. That disproportionate weight helps to maintain imbalances in the conduct of business, and thus economic circumstances. Figure 4 – Global Capital Flows (World Economic Forum, 2008, P. 2) The preceding reveals the relative significance of capital flow areas, with the imbalance in financial assets as shown by the flowing trend of financial liberalisation that has broadened between developed and developing countries: Figure 5 – Global Financial Liberalisation by Region (Rojas-Suarez, 2004, P. 4) Capital is the fuel in economics as previously mentioned that drives the development of products, new plants and the acquisition of raw materials. In developed countries this represents a highly sophisticated system of finance that include banks, financial institutions, equity markets and other means of raising capital to finance undertakings. Figure 6 –Global Financial Assets by Region (McKinsey Global Institute, 2007, P. 11) The worldwide growth in financial capital markets, as well as cross border lending, foreign direct investment has seen a surge in cross border capital flows as illustrated by the following: Figure 7 – Cross Border Capital Flows (McKinsey Global Institute, 2007, P. 16) The following shows the imbalance in the international economic system with respect to this area: Figure 8 – Average Capital Inflows, Less Outflows (McKinsey Global Institute, 2007, P. 19) The preceding represents the criticisms offered by Hirst et al (2009, P. 2) who state that “… the world economy is far from being genuinely global …”. They state that “… trade, investment and financial flows are concentrated in the Triad of Europe, Japan, and North America …” Hirst et al (2009, P. 2). The following illustrates their point: Figure 9 – Cross Border Capital Flows (McKinsey Global Institute, 2007, P. 21) The above is further amplified by a look into cross border financial holdings: Figure 10 – Cross Border Financial Holdings (McKinsey Global Institute, 2007, P. 22) The foregoing imbalance was pointed out by Hirst et al (2009, P. 2) in that capital mobility has not produced “… a massive shift of investment and employment form the advanced to the developing countries …”. The Old/New Economic Order The heightened global competitiveness has seen the development of trade blocs that in essence represent new multi-national protective barriers as well as combined strength to negotiate. Hirst et al (2009, P. 2) advise that the dominance of the major developed countries hold sway over policy through their ability to impact governance measures via financial markets. Thus, while there is no defined global economic system, there are in fact players (Japan, Europe and the United States) that guide policies and direction, which serves their interests (Hirst et al, 2009, P. 2). The preceding illustration of the extent of financial controls means that developed countries and their trade blocs can shift financial inflows to developing countries thus causing them to amend their policies in keeping with their (developed countries) interests (Rojas-Suarez, 2004, P. 3). Key to the preceding is the setting of interest rates, which is the province of developed economies. Interest rates represent the cost of borrowing money that is amended upward by the risk as well as service in lending (Dickinson and Allen, 2002, P. 5). They, interest rates, are also subject to inflation as well as supply and demand in terms of the number of borrowers seeking loans. The largest trade bloc, in terms of monetary flows, is the European Union that is comprised of twenty-seven countries, contained just short of 500 million citizens that generate approximately 30 percent of the global gross product (Christiansen, 2007, P. 6). The North American Free Trade Agreement (NAFTA() comprises the United States, Mexico and Canada, with its total purchasing power in GDP terms making it the largest internationally (The International Economy, 2008, P. 18). Other regional trading blocs are represented by Mercado Comun del Cono Sur (MERCOSUR), which includes the nations of Brazil, Paraguay, Argentina and Uruguay (Jaguaribe and De Vasconcelos, 2003, P. 4) as well as the Association of Southeast Asian Nations (ASEAN) that includes Indonesia, the Philippines, Malaysia, Thailand, Singapore, Burma (now known as Myanmar), Brunei, Vietnam, Laos, and Cambodia (Singh and Salazar, 2005, P. 3), which represent the four major blocs. The point of the preceding is that the triad mentioned by Hirst et al (2009, P. 2) (representing the Americas, Europe and Asia, still hold sway over international commerce. The preceding thus explains why this segment has been titled as the old/new economic order is not new. In the spirit of fostering more organised commerce, entities such as the World Trade Organization (WTO) have come into being (in 1995) as a means to provide a framework for international trade that replaced the General Agreements on Tariffs and Trade (GATT) that was drafted in 1947 (Sampson, 2001, Pp. 5-7). The WTO provides a framework whereby member nations can negotiate trade agreements as well as resolve disputes, and provides an accession format for new nations to join (Sampson, 2001, Pp. 21-22). With 153 members, the WTO is the most influential organisation of its type, with membership acceptance taking years and in some cases decades as applicant countries must reform their legislative, financial, legal, macroeconomic functions, human rights and judicial processes in accordance with its rules and regulations (Deutsch and Speyer, 2001, Pp. 14-16). Defined, the World Trade Organization (2009) “…deals with the rules of trade between nations at a global or near-global level.” It is a forum for negotiation, and represents a locale where governments can go to work out varied trade problems under a framework of understandable rules (World Trade Organization, 2009). In a similar view, the Organisation for Economic Co-operation and Development (OECD, 2009) was formed in 1961and has 31 members among developed countries comprised primarily of the United States, the European Union, as well as Japan, South Korea, Canada, Turkey, Mexico and Slovakia. Its purpose is to provide a setting whereby governments can compare their “… policy experiences seek answers to common problems, identify good practice and coordinate domestic and international policies” (OECD, 2009). In 2007 the OECD reached out to Brazil, China, India, South Africa, Indonesia, Chile, Estonia, Russia, Slovenia and Israel as a means to extend its global platform in keeping with international economic cooperation (OECD, 2009). Macroeconomics As shown herein, the fuel that drives the international economy is financial. While it is products, goods and services that are traded, it is monetary availability that provides the means for such to occur. Central to the foregoing is an understanding of macroeconomics, which is defined as “The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors” (Houghton Mifflin, 2009b). That definition represents a narrower view that other interpretations that can be assigned to macroeconomics making it applicable from a global perspective (Snowdon and Vane, 1997, P. 110). Ahiakpor (2003, P. 29) aids us in understanding the broader manifestations by telling us “…Monetary matters, including inflation, recession/deflation, and the level of interest rates, are among the most significant in modern macroeconomics…”. The global scale and implication of the interconnected nature of economies has given rise to regional and international macroeconomics that Britton (2002, P. 16) states “… includes the determination of inflation and of nominal exchange rates, of fluctuations in the level of output and employment over the cycle, but not the determination of productive potential and the trend of output in the longer term. Macroeconomic policy means the use of monetary and fiscal instruments to achieve objectives for macroeconomic variables, principally inflation and unemployment.” The foregoing is illustrated by the following: Figure 11 – Macroeconomics (EconGuru, 2009) It, macroeconomics deals with the structure, performance as well as the behaviour of national as well as regional economies that included GDP, price indexes, unemployment and how an economic region functions (Blaug, 1995, P. 34). These factors have been brought forth to provide an expanded understanding of the international economy and the various factors it is comprised of as well as act upon it. Conclusion Hirst el al (2009) in their book ‘ Globalization in Question’ brought forth the underlying premise that globalisation is skewed to and for the benefit of developed nations. The research conducted has shown that while changes are being made the international financial systems, trading regulations and organisations as well as varied policies are set by them and thus the weight of the control these nations and their regional trading blocs. In reviewing the evidence of international finance, as is the case with economics, that law of supply and demand represents an over riding factor that is inescapable. In order to participate in the global arena of economics as a meaning participant, a nation must have the capability to produce goods and services that are competitive. In addition, the foregoing requires human capital and raw material resources and or availability as made possible by the capability to under write such activities. Hirst el al (2009) voice skepticism in the existence of international economics in the sense that it is truly global as a result of a broad number of evidence based facts. The fact that there is an interconnected world wide economic system is not called into question, what is brought forth is the manner in which participation is unequal and will seemingly remain so as a result of long standing underpinnings as well as other realities. The pillars that hold up the conduct of economics rests upon being able to finance market and business activities that includes expansion of current lines and investment in future innovations to garner market share. The simplistic lesson observed in the growth of a small business into a larger one through innovation and capturing increased share of the market so that it can achieve economies of scale to set prices that are competitive as well as secure staffing talent offers a look at the broader world discussed herein. The empirical evidence uncovered pointed to the imbalances that exist in global economics. The largest trading zones, as represented by trading blocs, are NAFTA and the European Union. The preceding is in keeping with the triad statement of Hirst et a (2009, P. 3) that identified the Americas, Europe and Japan as holding away over global economics. In today’s world that triad now includes China, and to a smaller extent Russia. Both of these countries fit and fulfill the supply and demand aspect as respectively represented by China’s huge domestic population, and Russia’s vast oil and gas resource thus providing them with different side of the supply and demand equation as their strength, and thrusting them onto the global economic stage as major participants. The preceding summarization of the findings of this study offer up an explanation as to the myth statement represented by Hirst el all (2009, P. 2) that NAFTA and the European Union illustrate, along with the above examples. The outlook, however, is not dark as entities such as the World Trade Organization (Deutsch and Speyer, 2001, Pp. 14-16) and the Organisation for Economic Co-operation and Development (OECD, 2009) provide a framework as well as forum for lesser-developed nations to participate in the international economic arena. Thus, while there is truth to the statement made by Hirst el al (2009, P. 2) that “In some respects, the current international economy is less open and integrated than the regime that prevailed from 1870 to 1914”. However, the need for developed countries to expand, along with the preceding global organisation, change is in the wings. References Ahiakpor, J. (2003) Classical Macroeconomics: Some Modern Variations and Distortions. Routledge. London, United Kingdom. P. 29 Alam, M. (2003) A Short History of the Global Economy Since 1800. Northeastern University. Boston, M A, United States. P. 3 BBC News (2007) The downturn in facts and figures. 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