Globalisation Transnationals and Economic Policy - Essay Example

Topic one: international trade Using a pay-off matrix, outline arguments for and against strategic trade policies in aircraft manufacture. Aircraft manufacture is one industry that lends economy of scale and for which there is a great tendency for one dominant firm to take advantage of increasingly higher returns should it be the sole competitor in that industry. A country could raise more income if it favors a domestic aircraft manufacturer over a foreign firm. Invoking a strategic trade policy and implementing it through a subsidy for a domestic firm raises concerns on the effectiveness of such a policy. Paul Krugman illustrates the case of strategic trade policy in aircraft manufacture using a pay-off matrix where America's Boeing competes against Europe's Airbus for export of a 150-passenger aircraft, and in which the choice rests only whether to produce or not to produce (Krugman 1987, pp. 136-137). Assuming that Boeing has a headstart, the likely outcome is that of Airbus deciding not to produce the aircraft, in favor of 0 loss, rather than to enter the market against Boeing, in which both firms would each incur losses amounting to -5. However, once Europe decides to subsidize Airbus, the outcome of the game shifts in favor of Airbus, and it can decide to go head-on with Boeing in the market, earning profits while Boeing incurs losses. Moreover, should Boeing decide to not produce as it would be incurring 0 loss in this, Airbus by producing the aircraft would allow it to raise its profits from 0 loss in the previous scenario with no subsidy to 110 profits post-subsidy by Europe. Krugman further notes that out of this, 100 represents a gain of national income for Europe, and conversely, a loss of the same amount for America. This shows that under some circumstances, a country can lift its welfare by supporting its own firms against foreign competitors. At the same time, a domestic firm can lower the profits of other firms which wish to enter the domestic market. Are strategic trade polices desirable Another reason for strategic trade policy as the case above is when viewed from the possibility of existence of external economies - one in which it has been observed that innovative firms, with huge investments in R&D fail to "appropriate fully the knowledge they create". This case is not evident in "perfectly competitive models" as when increasing returns is tied with economies of scale in markets with imperfect competition. The argument for strategic trade policy based on externalities however need not affect other countries' welfare negatively - as when governments choose particular industries or firms to support. However, this is not the case when externalities are at the national level, in which clearly free trade is at the mercy of a government's protectionist policies. Pursuing a strategic trade policy is limited by at least three factors that make it a less desirable option. First, external economies are difficult to measure, measurement of which is needed to formulate interventionist policies (i.e. difficult to measure the exact external benefit of say, a $10 investment in R&D). Second, rent-seeking firms could water down the gains from interventionist policies. Third, a country's considerations for its economy overall adds greatly to the empirical difficulty of formulating strategic trade policies (that is, "a country cannot protect everything and subsidize everything"). The above considerations however, according to Krugman do not render the pursuit of strategic trade policy undesirable. In most cases, they point to caution as to the difficulties are due to empirical considerations - and yet, governments are not altogether, lacking in information. In what sense, of any, is it appropriate to consider that international trade in today's world is free International trade in today's world can be considered free to a certain extent by measuring the progress done compared to the past. For example one indicator suggests that the pace of international trade is undergoing a rapid momentum in recent years: "global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly" (Bernanke 2006, n.p.).1 Another indicator of freer trade is that a large part of the globe is now engaged in international trade, such as China, India and the former communist countries. The rapid pace of opening and liberalization of markets around the world are also driven in part by the progress made by the World Trade Organization (WTO) in allowing the dismantling of trade barriers, although at a paced, multilateral setting. Nevertheless, free trade is also being facilitated by bilateral and other regional free trade agreements. While the comparative advantage argument for free trade has somewhat been rendered incomplete and not wholly convincing with the phenomenon of intra-industry trade which increasingly took a large part of global trade among those countries with similarly endowed capabilities, international trade in today's world still follows the path of free trade. This is evident by the progress done with market openings and the unprecedented increase in the share of international trade transactions to world gross domestic product in recent times. Topic two: The transition and FDI in central and eastern Europe Outline the objectives of incoming transnationals and host governments in the economies of Central and Eastern Europe. Transnationals entering the former communist states of Central and Eastern Europe are motivated primarily by two key objectives: (1) gaining market share and (2) utilizing the low labour costs in these countries. As a result of the maturing markets in the West and restrictions on certain industries (such as tobacco production due to public health concerns and advertising limitations), transnationals have looked to the market opportunities that can be found in CEECs. Low labour costs on the other hand, enable investors to gain leverage in their global strategy of increasing market share. The presence of comparatively low labour costs in CEECs provides transnationals bases of labour-intensive manufacturing operations as part of their export strategies to the West. The governments of the CEECs in their desire to transform their inefficient, centrally-planned economies to where market-driven and competitive industries are predominant have welcomed foreign direct investments as solution. Three key objectives to achieve this goal are: (1) technology transfer and modernization; (2) competition and the introduction of market forces and; (3) privatization. The first objective is meant to address the decaying infrastructure left by years of central planning of the economy - as modern technology is seen as crucial to be able to compete in the world markets. Moreover, domestic sources of capital are seen to be inadequate to address the technology gap. The second is seen to engender a "demonstration effect" in which domestic industries would in time, learn from the transnationals' operational efficiency, profitability and productivity. The third objective is meant to inject market forces through the transfer of ownership from the state to the private sector. To what extent are these objectives compatible While transnationals are quite clear in their corporate strategies of exploiting market opportunities and low labour costs, the objectives of governments in the region are hobbled by the lack of clarity of how they could leverage their advantages as well as the inherent structural difficulties in the transition to market-oriented economies (Bailey, Sugden & Thomas n.y.). One aspect in which the authors point to a possible compatibility is the goal of transnationals to make use of low labour costs while governments can use this as leverage to ask for technological transfer needed for modernization - and yet, governments fail to specify and target the kind of technology they want and need. Behind the seeming willingness of transnationals to channel investments in the region lies the overall corporate strategy to achieve market domination on a worldwide level - thus manufacturing facilities (if they are indeed built in a certain country) are seen as cogs of overall machinery of global corporate strategy. In effect, the goal of governments to gain modern technology transfer is watered down according to the interest of foreign firms. As pointed out, most investments tend to be of the low-technology type, little value-added in R&D - endangering the CEECs' goal of long-term modernization. Furthermore, it has been observed that transnationals make a point of investing in a single country in order to make it a jump-off point for export of products in neighboring countries. In this case, investments are confined to marketing activities and making use of distribution networks, in which transnationals do not have to put up physical investments per se - and thus incompatible with the countries goal of attracting real investments that would result in employment and technology transfer. Privatization on the other hand of formerly huge state assets have weakened free market competition, rather than strengthened it. As domestic capital sources are loath to invest in high-risk and costly investments, foreign investors have become de-facto monopolists where ownership merely changed hands. Efficiency gains are limited to the private sphere in accordance with global corporate strategy. Justify your answer, paying attention to the benefits and costs of FDI for economic development, and drawing out any implications for economic policy in such countries. The economic policy of CEECs should take into consideration the long-term and overall concerns of the country (another crucial party are domestic industries or entrepreneurs). The need for foreign investments of governments has resulted in transnationals' getting an upper hand in dictating economic policy (certain companies have successfully negotiated for protectionist policies to gain advantage against competitors in exchange for investments). The authors have pointed out to the lessons learned from the success of the economies of Asian economies which relied not in foreign investments per se, but took into consideration the long-term need of domestic industries to develop (Bailey, Sugden & Thomas pp. 306-308). A danger of the entry of foreign firms is to eliminate domestic competition before they are ready in fact to compete. Thus, Korea and Japan, for example limited foreign direct investments so that domestic industries had the chance to develop and to compete later on. Moreover, these Asian countries were specific and targeted on which aspects of foreign direct investments they were in need of, so that in the aspect of technology transfer, they were not only able to learn from foreign firms, but also improved on them. However, one difference between CEECs and Southeast Asia is that the former do not have an entrepreneurial culture due to decades of state planning. The implication is that while caution must attend foreign investments, transnationals are needed by these countries. Topic three: Britain and the Euro Critically assess the arguments for and against Britain joining the Euro. (what are the main barriers to entry) When the United Kingdom, together with Denmark passed out of the chance to join the European single currency in 1999, advocates thought that the country will be marginalized out of the European single market, and its trade with other regions will be negatively affected as well. Moreover, Britain would attract less direct investments. Politically, advocates for joining the European monetary union believe the UK would also regret not being involved with joining the momentum towards closer integration with the continent, when many countries such as Germany, Italy and Germany had already done so. Consequently, Britain would lose its leadership and the chance to have a role in shaping the future of Europe. Those who oppose on the other hand, cite the dangers of the shocks to the British economy of a unified currency, already played out when the European Exchange Rate Mechanism (ERM) caused chaos in 1992-1993. Though Britain eventually joined the ERM in 1990, critics still believe that by standing aside, the country will keep its competitive edge. Those who oppose the monetary integration also point out that Britain's future lies with the vibrant economies of the Pacific and not with its European partners, whose governments and economies are heavily regulated and bureaucratic, in contrast with that of Britain's free and open economy. They believe that Britain should think globally, not regionally While, both sides seem to have sound arguments on what should be Britain's position, the key question is not however if Britain should or should not join the single currency, but when the country would be ready to do so. As clearly stated by Gordon Brown, Chancellor Exchequer, that while in principle, and in terms of eventual economic benefits, nothing stands in the way for Britain to join the EMU, the main barrier to entry was principally the issue of convergence, at least on the question on whether would adopt the single currency in 1999 (Brown 1997). Britain's business cycle is still apparently far from the pattern of most of Europe, especially with France and Germany whose interest rates hover at 3%, while optimum interest rates in Britain are at 7% that stave off inflation. Structural differences of the British economy with those of its European partners particularly due to trade are some of the reasons. However, the effect of the single European market, would apparently contribute to the eventual convergence in the business cycle of Britain with the rest of Europe. Another barrier entry cited by Brown was in terms of flexibility of the economy to withstand shocks once the power of monetary policy will be taken away. This is especially crucial and tied with the converge issue. Indicators that point to the need of Britain for more flexibility are the unemployment problem and the lack of competitiveness in some areas. In your view, should Britain adopt the Euro Justify your argument. For Britain, more than any other European state, joining the European monetary union represents not only economic integration, but a cognizance that it is a big step towards political union as well. Among the countries of Europe, it has historically not only concerned itself with Europe politically but with a large part of the world and many of those are opposed for adopting the euro are concerned that Britain's relations with the rest of the world will be limited within Europe only. However, Britain is definitely with Europe, as part of the European Union but is not at the same proscribed from maintaining relationships with other regions or countries. Greater economic integration of Europe is the bigger goal that must concern Britain, and it should adopt the euro to achieve this. For as the single market of Europe is already a reality, the economic policies that would emerge as a result of the single currency would stem a great deal from looking at the economic future of Britain inextricably linked with Europe as well. It has been argued already that without a single currency, the unified European market will not bring as much benefits as it has been envisioned. A single currency would benefit Britain in terms of trade, transparency of costs and currency stability with respect to the European single market (Brown 1997). It is rather that Britain recognize the economic benefits that would result as with the single currency, then deciding that it will have to join in not too a late a fashion to safeguard the dangers of being an outcast, and then addressing the preparations needed so as to minimize the possible negative effects of adopting the euro. The main barrier to entry - convergence, must be looked into how the loss of monetary policy would affect the economies of Europe as an aggregate body and on every country in case of downturns in the economic cycle. Being a single market, Britain together with the rest of Europe would be susceptible, for example, in the case a fall in the demand of European products (Currie 1997, p. 9). While, it has been stated that Britain's households are more sensitive to interest rates more than their German counterparts, accordingly, with greater economic integration as a result of the single European market, convergence of Britain's economic cycle with the rest of Europe will eventually happen. Topic four: the environment Explain how the market 'fails' in the context of negative externalities. The market fails when the true costs and benefits are not reflected in the transactions, and parties which are not strictly involved become the beneficiary or the affected party in the spillovers of such transactions. This is true with positive and negative externalities involved with markets such as can be found in oligopolies and monopolies. The causes of failures are imperfect competition, lack of information for both buyers and sellers and resource immobility. In the case of negative externalities, such as one that concerns the environment such as pollution of natural resources, loss of biodiversity, loss of rainforests and climate changes are consequences of activities of firms not taking into account the total social costs of production. Externalities create a differentiation of social costs and private costs, where social costs include not only private costs but spillover cost (externalities). For example, when a firm produces a good that harms the atmosphere, the social costs tend to be higher with the negative externality produced (harm to the environment) which are not accounted for by private costs of the firm (thus, social cost = private cost + externality). More particularly to show how the market fails, the firm is assumed to be profit-maximizing and only after its own interest, and where the negative production of externality results in which the marginal social cost exceeds private marginal cost. Typically, the firm will tend to maximize profits and will be only interested in covering for the private costs as a result of producing the good. This is different when taken into the view of socially efficient production, in which costs arising from negative externalities would be included with the private costs of production. Thus, in this case, the market fails when a producer of a good fails to take into account the negative externality arising from producing the good, and third parties not included in the transaction of producing and buying bear the burden of external costs. Are using allocating property rights, regulation and other market based approaches (taxes, subsidies and pollution permits) to reduce pollution a sensible policy idea Proponents of property rights to solve environmental externalities theorize that if rights are given to natural resources such as land, water systems, then externalities would be internalize and it would be on the owner's interest to protect his resources. Thus, in case a firm pollutes a tract of land, then the owner would naturally sue for compensation over the damage to his property. In reality, however, environmental problems exist globally where rights to property are difficult to define - where the strength of the property rights approach of one-to-one party negotiation is not at all present and reinforcing. Moreover, where monopolies exist, the presence of many parties reduces the efficient bargaining process. Also, since the environment externalities concern future generations as parties, there is no clarity on who is bargaining on behalf of the next generation (Helm and Pearce 2002). Regulation to address negative externalities include when a country passes a law which forces firms or producers to comply with specific regulations (i.e. Clear Act in the US and other countries) is less effective if it is only the policy instrument used because regulations do not reflect the true costs and benefits of externalities while endangering a firm's ability to produce at its most optimum level. The imposition of taxes and subsidies are policies are considered more pragmatic and sensible in addressing the market failure that arises out of externalities. If it is assumed that a government uses a tax or a subsidy to balance the demand and supply of environmental assets, as when a tax or subsidy on oil refiners, results in cleaner air and the government uses the revenue in energy conservation. However, in countries where the government uses tax revenues to finance other areas, then the policy becomes less effective. Also, the information to know the actual cost and damage from the producer and affected party are rigorously required for this policy to address the market failure. Pollution permits assume competitiveness of markets, but as policy idea it is very sensible since polluters get an incentive to comply towards a cleaner environment after which they are free to trade their permits at a market price (such in the case of emission target being the environmental quality objective). Unlike, taxes and incentives, the issuance of pollution permits focus on quantity incentives, rather on price incentives and thus addresses the problem of directly quantifying environmental assets. The polluter is given an allocation according the emission target through a permit, and the basis of the allocation would be the historical pattern of emissions. A polluter with a low abatement cost (A), so that the market price (P) > A, will have an incentive to sell its permit, and surrender the right to pollute (Healm and Pearce 2002, p. 13). High cost polluters, with P Read More