The Development of the World Economy - Assignment Example

Is ‘Underdevelopment ’, as described by Andre Gunder Frank, an inherent part of the global economy? Why and why not? In addition to Frank, use at least 2 other thinkers to explain the answer. According to Andre Gunder Frank international capitalism is the force behind dependency relationships between countries. The underdevelopment many countries face is due to the historical product of past and present continuing economic reforms and relations that developed countries continue to undertake. The relations and links between developed and underdeveloped nations is what further worsen the divide. The capitalist system has over the years formulated an international division of labour which is largely responsible for the underdevelopment of many areas. These dependent, underdeveloped states supply cheap minerals, raw materials, agricultural commodities and cheap labor. All these raw materials are manufactured into secondary, more expensive products by the developed nations and they take advantage of it. These underdeveloped nations also serve as repositories of obsolete technology, manufactured goods and surplus capital. Due to the interest developed countries take in cheap labor, cheap raw materials money does flow into the underdeveloped nations but the allocation of these resources are for their own economic interests rather than for the well being of poor nations. Rigid division of labor is a necessary condition for efficient allocation of resources and this according to dependency theorists leads to poverty. These dependency models also rest upon the assumption that economic and political power is heavily concentrated in the industrialized countries, this is the view shared by Karl Marx’s theory of imperialism also. However the Karl Marx’s theory of imperialism explains a developed nation’s expansion while dependency theorists like Andre Gunder Frank explain the consequences of these imperialists’ policies. Raul Prebisch, a liberal reformer also studied the problem of economic growth in poorer countries. It is puzzling to understand why the growth from industrialized nations is not translated to the poorer nations. Initial explanation for this was simple: Poor countries only exported primary commodities to their rich partners who further developed them into secondary products and sold them back to the poorer countries. Poor countries would thereby never earn enough from the exports to pay for the import which is why there will always be a capital shortage. Prebisch suggested that underdeveloped countries should embark on import substitution programs, and manufacture everything locally. This however does prove to be impossible as there are simply not enough economies of scale, not enough technological infrastructures and the overall manufacturing climate is poor. At this point the dependency theory is viewed as an explanation for underdeveloped nation’s state. Andre pointed out that without studying the past conditions of underdeveloped states no further policies can be devised to improve their conditions. He states a very important fact that as many historians don’t focus on underdeveloped nation’s research the prevalent idea is that the current situation underdeveloped states are in is what all the developed countries also faced at one point. It is widely accepted that the underdeveloped countries are in a stage and they will eventually progress on to become a developed country but Andre firmly argues this belief. According to him the current developed nations were never underdeveloped although they may have been undeveloped at some point in time. Underdevelopment is an inherent part of global economy, as it is bred due to capitalism. Capitalist states are the major economies in the world right now and they will continue to exist and take advantage of the inexpensive labour and material available in underdeveloped countries. Underdevelopment is not due to shortage of capital of incorrect policies a country has but rather it is because of the development of capitalism. 2. The flow of capital across borders has increased dramatically since the 1970’s, so much that some day we are witnessing the “Financialization” of the global economy. Overall, has the explosion of global finance benefited or harmed developing countries? Why or why not? What can states do to better manage the power of finance? Use at least 2 other thinkers to explain the answer. Financialiazation is a very controversial process that occurs in the global economy. It is a process in which financial markets, institutions and financial elites gain influence over economic policies and outcomes. This is in all effects wrong as it results in transformation of economic systems both at a macro and micro levels. It ends up in increasing the significance of the financial sector compared to the real sector; there is a transfer of income from the real sector to the financial sector and all this results in income inequialty and wage stagnations. It is thereby financialization that puts the economy at risk and leads it to prolonged recession. There is no sustainability of this process and it does lead to a debt ridden economy. In United States and other industrialized nations financialization is greatly prevalent. American writer and commentator Kevin Phillips presented financialization as “a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.” It is due to this prevailing condition that eventually the 2007-2010 global economic crisis happened. In the Introduction to the 2005 book Financialization and the World Economy, Editor Gerald A. Epstein wrote that “in the mid- to late 1970s or early 1980s, structural shifts of dramatic proportions took place in a number of countries that led to significant increases in financial transactions, real interest rates, the profitability of financial firms, and the shares of national income accruing to the holders of financial assets. This set of phenomena reflects the processes of financialization in the world economy....” He clearly states in his book that this financialization phenomena has become increasing popular over years but some of the effects in relation to globalization are highly detrimental to a huge number of people around the world. Financialization leads to eventual financial speculation that causes a misalignment of exchange rates. This greatly affects the trade levels of poorer countries as they make less money from their exports and also the theory of competitive advantage is invalidated. Turkey can be seen as one example of the negative effects of financialization. Around the beginning of 21st century Turkey was in a great need of stabilization, IMF helped launch a stabilization program in 1998 but instead of improving matters in further plunged the nation into recession. The reason for this failure was incorrect economic policies. The Turkish government adapted an exchange rate stabilization program, after an initial period of success, there was a massive attack on the Turkish lira and a rapid exit of capital. The currency depreciated and the interest rates rose dramatically. Once the currency collapses the whole nation is financially vulnerable. This is a good example of financialization and the eventual crisis as Turkey’s banking sector was heavily reliant on the earnings from high spreads between deposit rates the their T-Bills. For reducing inflation the T-bill rates decreased faster than deposit rates putting the whole banking sector in jeopardy. Extremely detailed policies have to be designed by countries clearly keeping in mind the vulnerabilities and pitfalls of the financial sector. Due to the recent global crisis all the underdeveloped nations were severely affected. There was a massive reversal of currency positions and extremely negative impact on the exchange rates of developing countries. FDI flows stopped and will only decrease further as now investors are even more risk averse. Countries with stabilization funds did manage to emerge out of the financial crises but a lot of underdeveloped countries were hit because of their heavily reliant international trade strategies. This whole crisis was due to inadequate regulation of banks and financial markets, now there has to and expansionary monetary, credit and fiscal policies in all industrial countries and developing countries should adopt these policies individually and in a coordinated way. 3. For much of the 20th century the Nation-state has been focal point of the identity, community, and power in the world. Is the age of the Nation-state over? Why or why not? If so, what is coming next? Use at least 2 other thinkers to explain the answer Defining the nation-state is a hard task due to the fact that in English usage both nation and state are used interchangeably. However the nation-state is defined as a type of political military rule that has a distinct geographic territory, has sovereignty over its territory, has a government made up of public offices that serves the population and has fixed boundaries/borders. Also its population has a sense of national identity and the government can thereby rely on the obedience and loyalty of its inhabitants. For a lot of scholars the nation-state hasnt outlived its usefulness. City-states largely disappeared during the period of enlightenment. By the time that Germany and Italy became nation-states in the late 19th century, most of the West had already turned into nation-state form. Those nation states had more military power and stimulated trade by eradicating barriers. Conditions in the 18th and 19th century made city state obsolete which is why 21st century will perhaps make the nation state obsolete. Prevalent conditions have made nation states increasingly ineffectual in dealing correctly with real problems. Terrorism, financial crisis, immigration, trade, global warming etc all are issues that countries are unable to deal with individually. Already in Europe nation states are gradually giving more power to the EU. Nation-states have only led to historic bloody wars, for many thinkers it is necessary to emasculate these nation states now that so many of them possess nuclear weapons. Globalization is one factor that has greatly hurt the nation-state paradigm. Some argue that predatory market forces make it impossible for a nation-state to shield their populations and prevent trade. Governments have become weaker and less relevant then before due to globalization. However national jurisdictions have still not vanished yet and perhaps they never will. It is due to trade, communication and the power of internet that he borders have somewhat blurred but even during this time states have not become less important, they continue to work for their population, manage economy of the country and monitor activities of their members. Van Creveld says that the nation state, born out of wars was originally a’ machine for imposing peace and quiet’ yet due to the subsequent nationalism they ended up engaging in more wars which discredit their image a lot. Roger Scruton, however, tends to view the nation state favourably as an achievement, it was not due to the technology development that they came into being, it was because of various cultural and religious purposes. This universal system of law led to resolution of conflicts according to him. Roger Scruton’s viewpoint is correct that the nation sate will be challenged but it will still exist. It will be able to withstand pressures from migration and globalization but the original sense of nationality will not disperse. 4. Does America today, or did it ever, exercise hegemony over the international economy? If so, is American hegemony a force for stability and growth, or instability and exploitation (or both or neither)? Use at least 2 other thinkers to explain the answer [European] capital markets cannot equal that of the U.S. in breadth, liquidity, and competitiveness in the foreseeable future. – Despres, Kindleberger, and Salant (1966, p. 528) It is tempting to look at the market as an impartial arbiter. But balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy, a number of countries, including the U.S., opted for the latter. -- Paul Volcker (1979, p. 4) Globalization is a process that many countries have had to react to, but the strong power of America not only helps in restricting globalizations effects but also affect the speed and character of the globalization process itself. After word war II, the U.S. acted as was predicted by the hegemonic stability theory. Their foreign policy and political, economic, social structure also shows how globalization has emerged. At the end of World War II, U.S. exhibited two very important characteristics. Firstly, it possessed the dominance that would lead to hegomining both incentive and capacity to increase globalization. Being the most productive economy, they were to benefit the most which is why they coerced the world to engage in freer trade. They further exploited their power as the countries that dissented were isolated or sanctioned. Secondly the liberalism of their domestic economy showed that it would be favorable to have the same liberal policies internationally. Even though America opened up to freer trade because of their decades of economic power they have remained virtually economically isolated as no other countries economic woes have any impact on them. It was their own recession that led to crisis locally and also eventually to the world global economic crisis. America has always exercised hegemony from the period of cold war to the current period it can be seen that they are the most powerful nation in the world and they exploit other countries to their advantage. One would argue that due to their liberal trade policies many other countries economic systems also benefit. But that again is yet to be proved as underdeveloped nations always have a host of their own domestic problems and for some reason or other never truly achieve success. America has always been at loggerheads with countries that oppose its beliefs, ideology and systems, Russia, China are two big examples. Politically America has had issues in the Middle Eastern regions and has always sought to impose sanctions on Iraq, Iran, Lebanon and Syria. The world at the end of the day is divided into two pairs, a nation is either a U.S. ally or not. The stability America says it tries to provide is very controversial, the invasion of Afghanistan and Iraq will never be seen under one viewpoint and several wrong doings can be pointed out in the U.S theory that they were trying to stabilize these two countries. Try to stabilize countries both economically and politically actually leads to further upheavals as there are always global repercussions in these hard times. REFERENCES: "Is the Nation State Obsolete?" The Brussels Journal. Web. 07 Dec. 2011. . Opello, Walter C, and Stephen J. Rosow. The Nation-State and Global Order: A Historical Introduction to Contemporary Politics. Boulder, Colo: Lynne Rienner Publishers, 2004. Print. ""Dependency Theory: An Introduction," Vincent Ferraro, Mount Holyoke College, July 1966." Mount Holyoke College, South Hadley, Massachusetts. Web. 08 Dec. 2011. . Epstein, Gerald A. Financialization and the World Economy. Cheltenham, UK: Edward Elgar, 2005. Print. Frank, Andre G. The Development of Underdevelopment. Boston: New England Free Press, 1966. Print Read More