Financial Market of Xcolonia - Assignment Example

Econ 336: Final Exam (Spring Solutions Import- substituting industrialization is a policy that is mostly used by small and developing countries. Its main aim is to replace foreign products with domestic products. This helps such countries reduce their dependency on foreign countries through local production of industrialized goods. However, I would not advocate for the approach of import- substituting industrialization since it promotes inefficiency since the local industries are not exposed to global competition. Inefficiency may consequently result to a reduction in the GDP. This exposes Xcolonia to unemployment risk. Xcolonia is a country that has a comparative advantage in agriculture and textiles (Krugman et al. 55). Machinery production requires complex technology, which Xcolonia does not have. Easy export substitution would, therefore, be the best strategy for Xcolonia, where they export agricultural and textile products, and this will speed up industrialization. This strategy will help Xcolonia to create profits and reduce their debts. It will also trigger the productivity that will result to increased exports and greater efficiency. 2. By unlimited labor supplies the labor, the labor minister means that the labor supply in Xcolonia exceeds the labor demand. Thus is a characteristic of many small developing countries, where there is a labor surplus. However, most of this labor is unskilled and this may inhibit the growth since technical progress necessary for growth requires skilled labor. The Lewis-Ranis Fei model suggests that the economic growth take place if agricultural laborers are transferred to the industrial area, where their productivity would increase (Williamson et al., 44). This design is based on the assumption that the economy of concern is dual with a stagnant agricultural sector and a dynamic industrial sector. Therefore, at the point where marginal productivity equals zero, labor can be transferred to the industrial sector without any loss in agricultural sector. In the first stage of the model, there is disguised unemployment because the labor supply is perfectly elastic, and the marginal productivity of labor is zero. This disguised unemployment is transferred to the industrial sector at the constant institutional wage (Fort and Ricardo, 27). Due to the constant institutional wage, the labor supply curve is horizontal at this stage. However, this does not last forever. This can be shown using diagram 1. 3. Land is a major factor of production, and an important asset for the rural and urban poor. It provides a foundation for the economic and social development. Land reforms refer to the process of changing laws relating to the ownership of land. It aims to transfer land from the most powerful agents in the economy to the less powerful agents (Moyo and Sam, 25). Sound land policies provide security that is necessary to promote investment. Raw materials exportation is one of the strategies in export, in export substitution. However, a country must export much raw material. For Xcolonia to be able to export much raw material, land should be equitably distributed amongst the citizens. They should be able to access land in an easy way. There requires sound land reforms that ensure that there is an equitable distribution of land in the country. Manufactured goods are also a strategy for the export oriented industrialization (Moyo and Sam, 25). Xcolonia has succeeded to achieve industrialization of agricultural and textile products. However, to attain this, land should be easily accessible and well distributed. Therefore, land reforms will improve the success of the export substitution approach. 4. Well defined and secure land rights provide incentives for investment and sustainable resource management that promote low cost transfers of land and credit access. Land is a key asset for development of the poor both in urban and rural areas. Proper land reforms ensure that land is accessible to the productive economic agents and also that they can use the title deeds as collateral in the credit markets. This increases credit accessibility for entrepreneurs and thus increases opportunities for employment (Gordon and Robert, 67). In Eastern and Central Europe, formal land titling assisted to start mortgage markets that now comprise a large part of overall lending. 5. Xcolonia is an agriculturally based country. Her economy is largely dependent on agriculture. Being a developing country, it is obvious that a good proportion of her agriculture is climate based. This clearly indicates that environmental degradation will negatively affect her colonial since it is going to affect her agriculture. If the state concentrates only on the development and ignores the environment, degradation will affect the climate and subsequently, production will go down. This will decrease the agricultural production; coffee included and consequently, exports will reduce. Climatic change will not only affect the agricultural sector but also a well- being of the citizens. Industries release harmful products that threaten the health of human beings, and this may have negative effects on labor productivity. In addition, current development should not put future development at risk (Akram et al., 56) Environmental degradation puts future generations at risk of not being able to meet their demands. The state of Xcolonia should focus on meeting the current needs of the society without exposing the future generation at risk of not meeting their needs. To achieve this, governments should focus on preserving the environment. Environmental degradation will not only expose the agricultural sector to risk, but also the whole economy. Therefore, development should be wholesome and sustainable, laying more emphasis on conservation of the environment (Akram et al., 58). 6. Balance of payments records a country’s transactions with other countries. Coffee forms part of the main exports of Xcolonia. When Europa dumps a huge amount of coffee in the international market, which is subsidized, this negatively affects the coffee exports of Xcolonia. The subsided coffee will be sold at a price lower than that of Xcolonias coffee. Most countries will prefer the cheaper coffee, and this will reduce the amount of coffee that Xcolonia exports. To respond to this, Xcolonia may decide to lower the price of its coffee. However, there is a limit to this price reduction since the price of the coffee cannot go below the cost of production (Akram et al., 77). This will reduce the revenue that Xcolonia earns from coffee export, which has a negative effect on XColonias balance of payment accounts. Xcolonia imports oil from the world market. When the oil prices go up in the world market, it means that Xcolonia has to increase the number of resources it allocates the purchase of oil. This increases the amount that is spent on imports and has a negative effect on the balance of payment accounts of Xcolonia leading to balance of payments crisis. These two occasions results to reduced exports and increased imports which results to a negative balance of payment. Xcolonia may be forced to access debts to run the economy if the situation is extreme that also increases the debt volume. 7. A floating exchange rate adjusts automatically with the changes in the foreign exchange rates. The floating exchange rates helps economies dampen the impacts of and foreign business cycles as well as preempt the possibilities of having a balance of payments crisis. However, there is a risk of the unpredictability. The size and the persistence of country’s balance of payments deficits and surpluses depend on the system of exchange rates being used. Devaluation is usually undertaken to correct balance of payments deficit. The devalued currency of Xcolonia means that it has been weakened. This devaluation will stimulate merchandise exports and discourage merchandise imports. This will improve the terms of trade and increase the amount of revenues that Xcolonia will be collecting. The balance of payments will, therefore, improve since the revenues will increase. However, the dollar denominated debt will increase since the devaluation reduces the value of XColonia’s currency against the dollar (Rose 42). 8. Removal of trade barriers may result to short term structural unemployment. This will have a high impact on many workers, as well as their families and they, will resolve into undesirable behaviors for sustain ace. Crime level may increase and also the unemployed people may seek government assistance that consequently increases government expenditure. In addition, international markets withy surplus products may demo these products in the Xcolonia economy at a cheap price. The national companies will find it hard to compete with these products, and this will lead to their collapse. Liberalizing the business will expose the domestic industries to international industries, and this will increase competition and efficiency. However, the infant domestic businesses may not be able to stand the competition from international businesses without short- term protection policies. Trade liberalization will lead to pollution and environmental problems since most businesses will not include the costs of pollution and environmental degradation in the prices of their goods and this puts the future generations at a high risk (Akram et al., 88). Trade liberalization will increase national instability through international trade cycles since the XColonia’s economy will become more dependent on the global markets. XColonia’s businesses, employees and consumers will become more vulnerable to economic downturns of the trading partners. For instance, a recession in the USA economy leads to decreased demands in for Australian exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demands and increased unemployment. Under free trade, the gains of trade are unequally distributed depending on the level of development of the country. Xcolonia being developing country will receive fewer gains from the free trade. This will also expose Xcolonia to balance of payments crisis. Economic independence I key to political freedom. Free trade will lead to economic dependence and consequently, the political system of Xcolonia will have no freedom (Boone 42). 9. Financial liberalization usually results in the boom- bust cycle. During this boom, the bank’s credit base increases rapidly, and there is excessive credit. This makes the economy fragile and prone to the financial crisis. Though not all lending booms end up in a crisis, most do, and if it occurs, it may leave the economy badly injured. Capital market liberalization is systemically associated with greater instability of the economy. Proponents for financial market liberalization argue that it results to financial discipline in that they are forced to have good economic policies. However, direct foreign investment is a far much better strategy for long- run success of the economy. Liberalization of the financial market makes the economy subject to short term fluctuations which affect the economy negatively. The openness makes the economy sensitive to changes such as interest rates and capital tax rates. This makes it hard for the government to pursue legitimate objectives of economic stability (Kasper 23). Financial market liberalization will make the firms less willing to engage in long- term investments on the basis of short- term funds. Liberalization will lead to instability in the financial market and this has negative effects on growth. The risk of presence of the risk of instability discourages investment. Financial market liberalization does not result to increased sources of funds as argued by its proponents (Rose and Peter, 15). This is because it does not lead to increased investments. It discourages investments and, therefore, results to lees business creation in the economy. The proponents of financial market liberalization argue that the restrictions on short- term capital flows discourage foreign direct investment. However, this is not true since most of the economies that have succeeded in achieving high levels of foreign direct investment have imposed high levels of restrictions especially on short- term capital flows, such as China. Therefore, financial markets liberalization makes economies more volatile, with high probability of recession which discourages investment both local and international (Boone, Laurence and Nathaniel, 56). In East Asia, crises lead to bankruptcy, and corporate bankruptcy leads to undermining financial institutions; in both cases, there is a loss of organizational and informational capital, a loss that cannot easily be reversed. There are significant asymmetries and hysteresis effects: the booms do not make up for the losses, nor do the gains by some makeup for the losses of others. 10. Shortage of finances is a key hindrance to development in developing countries. Most of these countries obtain finances from the developed countries in the form of loans and grants. Sub- Sahara Africa, where Xcolonia belongs, is a net creditor to the whole world. Loans borrowed by any governing authority should be directed to the development to help the people of the borrowing country. Xcolonia, like most developing countries in the sub-Saharan region is heavily indebted. These debts were borrowed by the past regimes and are to be paid by the current ruling regime. However, Xcolonia should not pay these debts (Krugman 34). This is because, most of the financial resources borrowed flowed back as capital flights. The finances borrowed were captured by politically connected individuals and directed overseas where they were invested privately and, therefore, did not help the economy of Xcolonia. The debts also added more finances as capital flight on to the debt, and this was a response to the deteriorating economic environment associated with the rising debt burden on Colonic (Krugman 23). Xcolonia should not pay the debts since they were not used for the benefit of the people but instead were used to finance the oppression of the Xcolonia. Works cited Akram, Borras and Kay. Land, Poverty and Livelihoods in an Era of Globalization: Perspectives from Developing and Transition Countries. New York: Wiley. 2007. Print. Boone, Laurence and Nathaniel. Financial Market Liberalization, Wealth and Consultation. Chicago: HarperCollins. 2001. Print. Epstein. Capital Flight and Capital Controls in Developing Countries. New Jersey: Princeton University Press. 2005. Print. Fort, Ricardo. Property Rights after Market Liberalization Reforms Land Titling and Investment in Rural Peru. New York: Praeger. 2007. Print Gordon, Robert J. Macroeconomics. New York: Wiley and Sons. 1978. Print. Kasper, Wolfgang. Free To Work: The Liberalistion of New Zealand’s Labour Market. California: Cambridge University Press. 1996. Print. Krugman, Paul R, and Robin Wells. Macroeconomics. United Kingdom: Oxford University Press. 2006. Print. Moyo, Sam. African Land Questions, Agrarian Transitions and the State Contractions of Neo- liberal Land Reforms. Carolina: University of North Carolina Press. 2008. Print. Renshaw. Geoffrey. Market Liberalisation, Equity and Development. New York: Praeger.1989. Print. Rose, Peter. Money and Capital Markets: Financial Institutions and Instruments in a Global Market Place. New York: Wiley. 2000. Print. Stiglitz. The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis. 2010. Print. Williamson, Stephen D and Wesley. Macroeconomics. Michigan: Baker Publishing Group. 2005. Print. Read More