World Economy since 1945 - Essay Example

Running Head: World Economy since 1945 World Economy since 1945 [Institute’s World Economy since 1945 There have been various debates about the definitions of multinational firms. According to Christopher Tugendhat (1984), multinationals are very large corporations having far flung interests. Moreover, these companies work in more than one country. Since 1945 and the end of the Second World War (WWII), the world has undergone a number of high density events, which has had major impacts on the world economy and therefore major changes in International trade and the businesses have taken place. Along with these changes, there have also been some major alterations in the status quo of the world’s economy (Hughes, 2006). The years 1945 and the early 1950 have experienced a fall in the multinational investments. One of the prominent reasons behind a fall in the foreign direct investments was spread of communism combined with the harsh impacts of World War II. There was a spread of Communism in the Eastern Europe in the late 1940’s, and China experienced it in 1949 (Jones, 2005, p.30). During the war, USA was the only country in which experienced a significant increase in foreign direct investments. However, there was an eventual fall in the investments followed by a dramatic growth of the domestic economy. After the World War II, there was a major geo-political division of the world. This division was between the capitalist West, the communist East and the Third World (Dicken, 2010, p.16). This division proved to be very important for the multinationals. This is because it was through this division that the companies determined their strategies to expand or to internationalize. An independent economic system was made by the Eastern Block, as it drew boundaries around itself and the Eastern European Satellites. This boundary was made so that the foreign companies could remain outside, hence they were entirely excluded (Jones, 2005, p.31). The Western Economic order was seen to be much dominated by the US. Western dominance advocated for liberalism at the same time they maintained strict protectionist policies. Moreover, the previously decolonized countries from the 1950’s were being colonized and this led to an unprecedented beginning of internationalization and the emergence of a global economy (Hewitt, 2000, p.289). Most of the countries consider themselves to have observed resurrection from the early 1950’s, when the USA was left in a unique powerful position. It was because of Bretton Woods’s system that dollar was set as gold convertible, which made it a major reserve currency of the world. Majority of the countries had to reconstruct their war-damaged economies, which are why at that point in time the country’s economic growth was strong. Therefore, the period between the 1950’s and the early 1970’s became known as the golden age (Dicken, 2010, pg.17). One of the reasons behind an increase in the number of MNC’s was the removal of foreign exchange risks by standardizing gold as it fixed the values of the national currencies. These furthermore restricted capital movements, hence an additional benefit for MNC’s to use the local factors and exploiting them (Jones, 2005, pg.18). This furthermore led to a decrease in the communication costs and there was an increasing scope of tax reduction through transfer pricing (Ietto-Giles, 2005, pg.102). Post 1950’s, the world economy took a new turn, this involved great reliance on the state. This means that there was widespread application of the Keynesians and Liberalism. The systems established by the Bretton Woods led to widespread protectionism. These included concerns related to balance of payments and fixed exchange rates (Jones, 2005, p.32). Protectionism was aimed at improving the domestic production as opposed to the foreign produces (Coughlin et al, 1999, p.305). Hence, it was seen that these protectionist measures were aimed at protecting the domestic industries from being exploited by the foreigners, and moreover so that the domestic industry gets ample of opportunities to expand. It was seen that the International trade was immensely distorted because of tariffs and subsidies. Moreover, in the global North and South, protectionist policies were adopted. The developing countries also started to get the hang of the mentality of these MNC’s, therefore, their receptivity to them fell. This was to the extent that agencies were hired in order to measure and monitor the behavior of the MNC’s (Jenkins, 1996, pg.445). The Eastern block and majority of the developing countries disengaged themselves from global capitalism. There was a considerable increase in the role of the state in the developed economies. The Western countries started adopting protectionist measures and they even shut themselves for foreign companies. Moreover, subsidies were allocated to some major companies. This was done so that the companies can gain monopoly in the market. The Textile Industry sector of the US and the Common Agricultural Policy of the European Union were given many subsidies in 1962. In the periods of 1950’s until 1980’s, majority of the developing countries had closed down their economies completely too international trade. These were countries of Latin America, Asia and Africa. Along with the increased competition from the transnational corporations came the strengthening of the bond between the Third world countries, and this increased their power (Jenkins, 1996, p.451). All these developing countries moved their focus to industrialization, since they believed that it was a way of development along with that of state intervention. Their strategies on industrialization were purely based on Import Substitution Industrialization or Export Oriented Industrialization. Import substituting industrialization was merely based on domestically producing those goods, which could otherwise be imported. This means that there would be an increase in the local demand, which will lead to an increase in the aggregate demand, hence improved economies (Dicken, 2010, pg.190). Latin American countries such as Brazil focused entirely on Import Substituting Industrialization by heavily financing their industry by debt. This limited the MNC’s from entering their economies. Moreover, it was observed how the Export Oriented Industrialization concept was based on Adam Smith’s theory of specialization. This means that each country, which has a comparative advantage, in particular good, gains by exporting (Coughlin et al, 1999, pg 304). Therefore, there is mass production in the products a country specializes and has a competitive advantage. This means that more of the product will be demanded. There is a lot of government involvement as it is involved in determining the exchange. If the exchange rate is devalued, so it means that the exports will become competitive in the foreign markets. Majority of the banks of South Korea intervened and controlled the foreign exchange allocations by intervening heavily in the financial markets (Kay, 2002, pg.1082). Similarly, the Economic Miracle faced by Japan was due to its explicit exclusion of the foreign firms (Jones, 2005, p.41). There is a strange fact that although there has been a rapid growth in the spread of MNC despite of the spread of protectionist policies, but their room for manoeuvre has narrowed significantly. Multinationals have found alternate ways of expansion because of the impossibility of capital mobilization from country to country and the strict barriers of foreign countries. Many experts and scholars have analyzed that the growth of multi-nationals and internalization is due to market imperfections (Hymer, 1970, p.441). If the markets performed perfectly, then there could be no possible incentive for the transnational to control resources in other countries. The degree of government intervention plays a vital role in determining the level of market imperfection in a specific country. In 1960’s although the general trend was towards adopting protectionist policies, there were still some regions in which liberalization was going on. Most of the European countries were adopting liberal policies and they established an open and liberal international economy. The concept of free trade emerged within the member European countries. In the US, radical reductions in the tariffs were secured by Kennedy. The entire concept of removing trade barriers between the regional blocks was to promote free trade. While there was liberalization in some regions of the world, at the same time the others were trying to take strict measures to protect their country from falling into the hands of the foreign powers through indirect domination through the market mechanisms. It was noticed that the Western developed countries were more going towards free trade agreements and trade liberalizations, whereas the developing countries were taking strict protectionist policies. In 1970’s there were symbolic elements of the end of an era- this was because there was a collapse in the fixed exchange rate regime, which eventually showed deficits in the US balance of trade, along with the US dollar being devalued. This resulted in the development of international markets because of the control over the capital movements was slowly being dismantled. Moreover, there was a fall in revenues for more countries who had invested in the financial markets. This was because the price of raw materials fell sharply. However, as per the basic economics, a dramatic fall in the money supply leads to a sharp rise in the interest rates (Kay, 2002, pg.1085). There was excess of liquidity in the financial markets, which proved to be disadvantageous for the African and Latin countries, because it led to a burst of their long boom, and therefore an end to the golden era. Therefore, the developing countries that were aiming for industrialization and development failed in the procedures and rather went into a debt crisis in the 1980’s (Kay, 2002, p.1084). It was in the 1980’s that neo-liberalism reached at its peak (Hewitt, 2000, p.300). Neoliberalism led to financialization of everything along with deregulation. The developing countries were at the verge of a downfall. The Washington consensus ignored the status of the developing countries and instead assumed that with the stabilization, privatization and liberalization of economies would bring growth and development (Stein, 2006, p.596). It was at this period when the developing countries imposed austerity policies and encouraged the developing world to adopt wholesale trade liberalization (Shaikh, 2007, p.50). Hence, neo-liberalism in the norm since the 1980’s. There are few exceptions though. In fact, it is since December 1979, that Iran has nationalized majority of its companies, followed by Islamic revolution. They imposed protectionist and heavy state interventionist policies. Moreover, in Venezuela, since February 1999, the Bolivarian Revolution resulted in the nationalization of many key industries, followed by the election of Hugo Chavez. Therefore, study shows that 1970’s has been the turning point for MNC’s. This is followed by room for manoeuvre since the 1980’s. References Allen, T. and Thomas, A. 2000. Poverty and Development into the 21st Century. Oxford: Open University in association with Oxford University Press. Clark, D. 2006. The Elgar Companion to Development Studies. Cheltenham, Glos, UK: Edward Elgar Pub. Dicken, P. 2011. Global Shift. Los Angeles: SAGE. Frieden, J. A. and Lake, D. A. 2000. International Political Economy. London: Routledge. Harvey, D. 2005. A Brief History of Neoliberalism. Oxford: Oxford University Press. Ietto-Gillies, G. 2005. Transnational Corporations and International Production. Cheltenham: Elgar. Jones, G. 2005. Multinationals and Global Capitalism. Oxford: Oxford University Press. Kay, C. 2002. Why East Asia overtook Latin America: agrarian reform, industrialisation and development. Third World Quarterly, 23 (6), pp. 1073--1102. Mpra.ub.uni-muenchen.de. 2014. The Political Economy of Globalization – Revisiting Stephen Hymer 50 Years on - Munich Personal RePEc Archive. Retrieved on February 19, 2014: http://mpra.ub.uni-muenchen.de/23184/ Shaikh, A. 2007. Globalization and the Myths of Free Trade. London: Routledge. Read More