Rich and Poor Countries - Essay Example

Rich and Poor Countries Examine the divide between rich and poor countries and comment on causes and trends over recent decades Introduction The divide between the rich and poor countries of the world is not something which is new. However, the effects of the divide are now known to us in a way which was previously hidden from sight. For example, we can be fairly certain that Mogul empire in India was a rich empire in its time and many individuals in the empire were fairly well off. However, we can not be certain about the exact statistics and figures for their GDP or other socioeconomic indicators which show us how rich or poor a country actually is. Today, we know with a fair degree of certainty that certain countries have much higher living standards as a whole than other countries in the same region or in different locations. At the same time, looking at some countries in sub-Saharan Africa and the Middle East, it is easy to see that there is a visible difference between rich and poor countries. It seems that the primary reason for this divide is the lack of positive international trade but the divide may be conquered with the aid of technological knowledge transfer and the evolving approach to helping these countries which is taken by organizations such as the IMF, the United Nations and the World Bank. International Trade Global trade and international business between countries is a part of the larger process of globalisation which has been changing relationships between countries for many years. However, the relations between developing nations and their industrialised counterparts have not shifted much simply because there are many constraints placed on developing countries. These create barriers for their entry into several markets where their products might be unacceptable due to a multitude of reasons. To pick just one barrier as the most significant one is rather difficult but if a choice had to be made, it can be said that these countries have problems in taking part in international industrial trade simply because they are developing nations. As developing nations, they may lack the infrastructure, the technical know how, the production facilities and even the highly skilled labour which is required to produce quality goods (Bardhan, 2006). Industrialised nations like America or the majority of the nations comprising the EU have gotten used to a certain level of quality production which developing nations may not be able to create in certain specialised products (Wannacott, 1996). By its very definition, a developing country has a comparatively low standard of living, an underdeveloped industrial base and scores on the lower scale of the human development index. In contrast, developed nations have modern industrial setups with supporting infrastructures and they are less dependent on economic activities like agriculture or resource exploitation. The economy of a developed nation is based on continuous, self generated growth coming from the services or the manufacturing sectors of the economy (Sell, 2000). These are inequalities which are difficult to change overnight and nearly impossible to overlook when industrial trade relations are created between developing and developed nations. Feenstra (1998) gives the example of a Barbie doll and describes in detail how various components of the doll are made in different countries. The raw material comes from Taiwan and Japan, the assembly takes place in Indonesia or Malaysia and China supplies the dresses for the dolls. The total economic input for these countries per doll is less than $2 while it sells for about $10 in America. This is because the consumer in America is the one who is actually going to pay for the doll and requires the value chain which takes place in America to be added to the cost of production. The consumption of Mattel toys in the developed world far exceeds the consumption in the developing nations therefore all the marketing, development and design work is done in industrialised nations. Until the developing nations are able to create their own market for such branded luxury items, it is difficult to imagine that they will consume similar quantities of these goods. Additionally, while this process of outsourcing production helps the economy of a developing country for a short period, for sustained growth, the country has to establish home grown industries which can export indigenous products to other nations. As Feenstra (1998) reports, the majority of industrial outsourcing (with perhaps the exception of software outsourcing) does not require highly skilled labour. Assembly and other repetitive tasks which are outsourced to developing nations do not help in creating a new industrial base and until the developing nations can handle higher order parts of the production chain they will continue to face constraints in international industrial trade. Industrial trade is also dependent on free trade agreements between countries by which countries can mutually agree to reduce or remove any barriers to the import or export of goods between them. This can have a mixed reaction for the countries involved in the free trade agreement although the industrialised nation is often at an advantage. The simple reason for this is because the industrialised nation can offer far more to the people of the developing nation than the developing nation can offer to the larger market. Policy issues in international trade have also functioned as constraints for developing nations in the past. Countries have had barriers to imports for the protection of their own young industries. The goal of these barriers was to ensure that no one is treated unfairly in the process of global trade and they have been successful in meeting that goal for the most part. However, while achieving this goal, the policies also create an environment which is hostile to smaller countries with less industrial advantages. The UAE is a case in point since it seeks changes in international trade policies which are helpful to her own cause but has not moved towards broad changes in her own policy (Al-Qasimi, 2006). While policies of other nations can be constraints for developing nations, they can be countered by internal policies and international trade agreements between countries. India and Pakistan from a joint example where industrial trade between the two has led to confidence building and gives the people of both the nations a hope for a sustained peace between the countries. The political conditions of these and other developing nations often make investors vary of investing in these locations. However, once prolonged political stability is seen to come to the forefront, the countries can expect foreign and local investors to setup industrial concerns which drive the economy. Globalisation itself can be seen as a constraint since it is a process by which countries move towards specialisation in a certain field. While this allows the development of one specific type of industry for an underdeveloped nation, it does not permit it to create new industries or to strengthen other existing sources of production in ways which a developed country can. Economic liberalisation gives far fewer advantages to developing countries but without the process of economic liberalisation they would be left completely cut off from the international industrial trade since their neighbours might be more willing to pick up wherever they have left a slack (Bourque, et. al., 2005). At the same time, a developing country may also be faced with internal constraints like corruption and lawlessness which reduce the industrial output of the nation as a whole (Akyuz, 2003). This is certainly true for several Latin American countries where the social conditions are unfavourable to sustained industrial production. However, this is never a primary reason for low industrial output and problems with international industrial trade since several countries with the same problems have emerged as upcoming global economic powers like China, India and Brazil which are acting as guides to other developing nations. Global Policies In fact, the future for a level playing field and the transition of developing countries appears to already be underway since the majority of the World Trade Organisation is composed of developing countries which are striving to take part in the international industrial trade setup. These countries are following the guidelines given by the United Nations to increase their ability to produce as well as the quality of their production (UNIDO, 2000). In the industrial world, much like the business world, the wishes of the client reign supreme. Since the clients of these nations are industrialised countries, the developing nations will have to bring up their standards of production to remain competitive. The current policies of the IMF regarding low-income countries have been outlined by the Managing Director of the Fund (Rodrigo de Rato) who has set the adjustment of policies and economic bodies of poor countries as a priority. This would enable these countries to come out of debt and the poverty cycle on their own rather than assistance from the outside. In fact, the focus of the IMF appears to be on creating partnerships with countries rather than a master/slave relationship. At the same time, the IMF wants to take control of the areas which come under its expertise of macroeconomic growth, debt management, policy advisement and financial stability (IMF, 2006). Debt relief for the poorest countries of the world is a big part of this agenda since the IMF has already given 100% debt relief which was owed to it by the 19 poorest countries of the world. 13 of these countries were in sub-Saharan Africa and plans are being made to reduce or forgive the debts owned by several other poor nations. At the same time, policy recommendations from the IMF would prevent or restrict additional loans until certain conditions were met so that the economy has the chance to grow without substantial debt servicing (IMF, 2006). Perhaps the most controversial policy of the IMF is their involvement in governance policies where even a limited contribution or suggestions can be seen as a negation of sovereignty (Robinson, 2005). For instance, the IMF advises countries on how to improve their Public Expenditures since they are important for managing increased aid flows (Craig, 2000). This also helps in the reduction of corruption to a certain extent and can even create accountability for the governments. However, this is a thorny issue and the Managing Director of the fund has appealed for international support in these matters by saying: “But on governance and on many other issues, the international community must work together if policies are going to be effective. We are already talking with our colleagues at the World Bank about the division of responsibility between the two institutions. I look forward to discussing this approach further with the rest of the international community. (IMF, 2006, Pg. 1)” Conclusion The future of removing the divide between the rich and the poor countries does not move as much towards opening of markets and free trade. In reality, it is moving towards a trade of technology, application of good governance policies and establishing industrial bases which will allow efficient industrial production to take place at the same level in a developing country as it does in developed countries. This means that the government policies in developing countries will need to provide for the infrastructure and the incentives required for investment. Additionally, it will be towards the benefit of these countries to be both politically and economically stable if they do not wish to be reduced to a status of ‘failed state’ (Rodrik, 2004). I certainly believe that differences between rich and poor countries will continue to exist for several more decades and developing countries are at a significant disadvantage when compared to industrialised nations but I also think that the world is becoming more equal. Just a few decades ago the American Empire reigned supreme in all aspects of advancement and culture but the future leadership of the world could belong to the European Union or even China. It is clear to me that industrial relationships and the volume of industrial trade will form a significant portion of the equation in determining which country leads the world into the 22nd century. Works Cited Akyuz, Y. (2003). “Export dynamism and industrialisation in the developing countries” and “Competition and the fallacy of composition” in Developing Countries and World Trade by Akyuz, Y., Zed Books. Al-Qasimi, S. (2006). “Free Trade Agreements” Global Agenda: Untied Arab Emirates, 4(2), 13-14. Bardhan, P. (2006). “Does Globalization Help OR Hurt the World's Poor?” Scientific American, 294(4), 84-91. Bourque, J. et. al. (2005). “Making Sense of Trade Treaties” International Trade Forum, 4(1), 30-31. Craig, B. (2000). “Aid, Policies and Growth” American Economic Review, 90(9), 847-68. Feenstra, R. (1998). “Integration of trade and disintegration of production in the Global Economy”, Journal of Economic Perspectives, 12(4), 31-50. IMF (International Monetary Fund). (2006) “The IMF's Medium-Term Strategy for Low-Income Countries”, Remarks by Rodrigo de Rato: Managing Director of the International Monetary Fund, [Online] Available at: http://www.imf.org/external/np/speeches/2006/031606.htm Robinson, W. (2005). “Global Capitalism: The New Transnationalism and the Folly of Conventional Thinking” Science & Society, 69(3), 316-328. Rodrik, D. (2004). “Industrial Policy for the Twenty-First Century”, Harvard University JF Kennedy School of Government, Faculty Research Working Papers Series RWP04-047, November 2004. Sell, S. (2000). “Big business and the new trade agreements” in Political Economy and the Changing Global Order, Stubbs and Underhill (eds.), 2nd ed. Oxford University Press. UNIDO (2000). “Industry and Trade in a Global Economy with Special Reference to Sub-Saharan Africa” United Nations Industrial Development Organization [On line access - http://www.unido.org] Wannacott, R. (1996). “Free-trade agreements: for better or worse?” American Economic Review, 86(2), 62-66. Read More