Economy under the Microscope - Term Paper Example

Open Economy: Macroeconomics Under the Microscope An open economy is one that interacts freely with other economies around the world, a theoretically simple explanation that belies its actual complexities. Macroeconomics, the theoretical basis of the open market, involves the selling of goods and services produced in one country to another, and vice versa—another concept that on face value appears straightforward and generally positive from an overall economic perspective. The reality, however, of these economic practices are worth examining in detail in terms of assessing whether, as advertised, they indeed produce the best situation for the largest number or are merely tools of powerful economies to ensure their survival and dominance. The primary advantage for consumers living in a country with an open economy is obvious in that they have a much larger variety of goods to choose from. The caveat here must be “if they can afford to buy them.” Additionally, these consumers may also invest financially outside of the country. Regarding country as a political entity, it is not required to equal its output of goods and services and can, if it wishes, spend more money than it itself produces within its economy by borrowing from abroad, or it can spend less than it produces and lend the difference to other countries. The China Issue A primary example of this previous statement is the United States as the former country mentioned, and China as the latter, a situation widely discussed and criticized by many as detrimental to the future economic and political stability of our nation as well as its security. ChinaDaily.com quotes President Obama. “The long-term deficit and debt that we have accumulated (with China) is unsustainable. We cant keep on just borrowing from China... We have to pay interest on that debt and that means that were mortgaging our childrens future with more and more debt" (para. 2-3). At over $700 billion in U.S. government securities, and despite its own mixed participation in the open economy which discourages foreign investment, China is the single largest holder of U.S. debt. With a budget deficit of over 1.8 trillion, the US continues to import Chinese goods and allow it access to investment and debt purchase at a disproportionately alarming rate. With the world economy shrinking, concerns are many that China will either stop buying our debt or call in markers we are unable to pay. Third World “Benefits” of Open Economies Much of what is touted about the benefits of open economy to poorer nations is largely theoretical. Chidambaran in India in Transition presents a positive view of the results of India’s move to an open economy. “The Indian economy has responded well to the reforms. The growth rate has witnessed a secular rise. The average annual growth of GDP for the ten-year period 1996-97 to 2005-06 was an impressive 6.3 per cent” (p. 1). While India is often put forth as a major success story for open markets, the reality takes on a different identity when scrutinized by Hufbauer in Chen and Wolf who writes, “India has gained ground, with annual per-capita GDP growth of about 3.1 percent. But in absolute terms, India remains very poor, with per-capita GDP of about $1,900” (p. 12). Other problems affect the performance of Third World economies trying to become open. Chin in Rural, Urban Wage Differentials suggests, “The existence of large wage differentials and urban unemployment thus suggests that these economies labor markets are not functioning properly” (Introduction, p. 1).This reality, then, dilutes the effectiveness of the open market economy and may not be subject to change any time in the foreseeable future due to social variables. The notion that open economies will eventually produce greater prosperity for entire nations, and that at some point economic equity will be achieved is debatable given the societal and political inequities that exist and lack of what Hufbauer in Chen and Wolf describes as necessary political and social drivers. “He (Hufbauer) concludes that “one thing that will not happen … is a blissful convergence between rich and poor countries” (p. 12). Economist Jeffrey Sachs as quoted on BrainyQuotes sees it differently, perceiving open markets as not cure-alls but as positive catalysts. Sachs suggests, “In Asia, a lot of successful economies that had been living on their own savings, decided to open up their financial markets to international capital in the early 1990s. So here were countries doing quite well, but they decided theyd borrow a bit more and do even better” (Brainy Quotes). Controlled Open Economies Bevan, Collier and Gunning in their work, Controlled Open Economies, suggest the difficulties in theoretical discussions regarding smaller open economies and their function in relationship to America’s concept of open economies. “Most modern macroeconomics originates in America. Applied work uses American data, and theoretical work assumes an economic structure consistent with the salient features of the United States” (p. 1). The authors go on to suggest that to understand the small open economy concept, very different sets of methodologies must be applied not only to developing countries but to smaller economies as well, such as Sweden and Australia, which have formulated their own relationships between economic factors such as inflation and exchange rates irrelevant in the U.S. However, as Bevan, Collier and Gunning point out, “For developing countries the problems posed in applying modern macroeconomics are far more severe because economic structures are so (vastly) different...and most of them are heavily regulated by government controls wholly unfamiliar in America” (p. 1), which not only dictate the behavior of private interests but alter “macroeconomic consequences” ( p. 3) for the emerging open economy. NAFTA and the Open Economy Faux, Salas and Scott in their briefing paper, Revisiting NAFTA present an interesting perspective on the trade agreement as it relates to open economies, its actual effects and benefits on and for whom. As a former foreign minister of Mexico once remarked, NAFTA was ‘an agreement for the rich and powerful in the United States, Mexico, and Canada, an agreement effectively excluding ordinary people in all three societies.’ It should, therefore, be no surprise that NAFTA rules protect the interests of large corporate investors while undercutting workers rights, environmental protections, and democratic accountability (para. 2). As true in earlier comments about the effects of the open economy on the average Indian, Faux, Salas and Scott suggest “In each nation (affected by NAFTA), workers share of the gains from rising productivity fell and the proportion of income and wealth going to those at the very top of the economic pyramid grew” (para. 4). The “domino effect” of open economies can be examined in a summary of the United Arab Emirates’ (UAE) experience with open economy from NationMaster.com which concludes, “The UAE has an open economy with a high per capita income and a sizable annual trade surplus. Despite largely successful efforts at economic diversification, nearly 40% of GDP is still directly based on oil and gas output” (Overview, para. 1). The summary goes on to report that while foreign investors are being attracted by the benefits of free trade zones, “...Higher oil revenue, strong liquidity, housing shortages, and cheap credit in 2005-07 (has) led to a surge in asset prices... increasing the operating costs for businesses...and adversely impacting government employees and others on fixed income” (Overview, para. 1). The positive side, however, is that the UAE government is aware of the issue and is working on increasing educational opportunities and jobs in private sector employment. How serious the government is regarding this remains to be seen. Considering that a small number of the population in power is making millions on the oil industry, the question of their seriousness toward advancing the economic lot of the general populace can be questioned. Conclusion While the benefits of free trade and open economies may be statistically obvious in terms of GDP, somewhat less obvious is its benefit to the general populace in economic terms. For instance, China’s mixed economy at present seems to be trumping the open economy of the U.S.--but its benefit to Chinese citizens is questionable along with its ultimate negative effect on American financial stability questionable. Economies that see the benefits of the open economy with reasonable regulations and controls are thriving, perhaps not at the bubble and bust rates of the U.S. economy and its insistence on an unregulated free-market practices, but at a more reasonable pace that leaves less room for devastating blows from tsunamis in the international marketplace allowed under open economy principles. While some are becoming rich manipulating aspects of international economic investment, the affects on general populaces may be limited to the insistence by economic theorists who favor open economies and their predictions of its ultimate positive impact. As to whether open economies have improved the lot of poorer nations, this undoubtedly depends upon who is asked and upon the pecking order position they hold within the society. There is no doubt that the GDAs in many developing countries are rising. Whether that will translate into a better life for the masses remains to be seen. Works Cited Bevan, David M., Paul. M.Coller and Willem J. Gunning. Controlled Open Economies: A Neoclassical Approach to Structuralism. Oxford, England: Clarendon Press, 1990. Retrieved from www.questia.com. Chidambaran, Palaniappan. (2007). “India in Transition: Palaniappan Chidambaram Describes Indias Experience in Making a Transition from a Closed and Controlled Economy to an Open and Modern Economy.” New Zealand International Review, 32 (2007). Retrieved from www.questia.com. Chin, Judith. C. “Rural-Urban Wage Differentials, Unemployment, and Efficiency Wages: An Open Economy Policy Analysis. Southern Economic Journal, 65.2 (1998): 294+. Retrieved from www.questia.com. China Daily.com. Obama Says US Can’t Keep Borrowing from China. Website Updated: 2009-05-15 09:45. Retrieved from http://www.chinadaily.com.cn/world/2009- 05/15/content_7780835.htm Faux, Jeff, Carlos and Robert E. Scott. Revisiting NAFTA: Still Not Working for North America’s Workers. EPI Briefing Paper #173. (September 28, 2006). Retrieved from http://www.epi.org/publications/entry/bp173/ Hufbauer, Gary. (2001). “Trends and Prospects in the Global Economy.” China, the United States and the global economy. Eds.Chen, Shuxun and Charles Wolf, Jr. Santa Monica, California: Rand, 2001. 11-24). (Retrieved from www.questia.com). NationMaster.com. (2003-2009). United Arab Emirates: Economy. Retrieved from http://www.nationmaster.com/country/tc-united-arab-emirates/eco-economy Sachs, Jeffrey. Qtd from: Brainy Quotes. November, 2009. Retrieved from http://www.brainyquote.com/quotes/keywords/economies.html Read More