Key Structural Changes in the Economy and Society that Takes Place in a Developing Country - Coursework Example

ABC XYZ Economics 9th November, 2007 MODERN ECONOMIC GROWTH The ever changing nature of technology has done a lot to account for the new interdependence awareness. The rapid growth of technology based on computers has given rise to the information technology age where distance is not an issue for locating units of production and distribution of goods and services all over the world. “Economic stabilization is developing countries concern the attempts to solve the issues related to excessive or unsustainable balance of payments deficits to reduce the amount of domestic inflation, it also involves exchange rate reform and changes in the systems of import protection”. (William R. Cline, 1981) A country or a state may take these economic efforts to support its financial program from the international monetary fund or from any other source like the bilateral financial services. Economic stabilization has become a central policy issue for many developing countries and for international agencies and stabilization also became a priority issue for countries in Asian, Africa and other Middle eastern countries as worldwide inflation and balance of payments pressures associated higher oil prices affected the developing countries all over the region. Increased capital flows have been directed toward developing and advanced countries economies alike and the emerging economies are a culturally diversified group of international countries. The range of deregulatory initiatives affecting domestic and international financial transactions includes the abolition of the capital and interest rate controls and entry of foreign investment to domestic markets and all these factors combines with technological progress has greatly reduced the transactions costs and widespread of financial innovations have broken down the barriers between the international economies. ECONOMIC DEVELOPMENT Although economic development in any country is generally associated with the higher input of income levels but rising productivity may lead people to prefer increased level of leisure activities than the increased income. An estimate in productivity growth per capita is generally referred as productivity but the most widely used means to measure the productivity per capita is assessed by the GDP rate as this growth focuses more on the growth of material living standards rather than the growth of the productivity. When a common indicator of person’s well being is used, the problems relating to different cultures could arise. In many developed countries, political democracy and the other functioning of democratic institutions are highly involved in assessing the overall growth of that specified country. On the other hand, when the term ‘under-developed’ is used, it means that the underdevelopment has a sense of being imposed rather than a situation where a country fails to achieve development (Frank, 1969). That means the today’s developed countries were underdeveloped economically at one prior time before taking off into economic development. Contrarily, present days’ developing countries like Africa, Asia and Latin America have not only been underdeveloped but also subjected to underdeveloped. So according to Ezeala-Harrison (1995) underdevelopment may be said to be imposed on a country either by external or internal forces or means. Economic development encompasses the economic circumstances of a country and this process changes over time as it envisions how these economic factors can be made to change positively. Last two decades have proved to be very difficult for less or under developed countries because most of the regions in Africa, Asia and Latin America suffered severe declines in the per capita income and this situation even worsened as the global recession brought a heavy burden of accumulated debt. The new world economic order after the cold war seemed to be rather difficult for the poor nation people as it meant redirection of emphasis and investment resources and financial aid away from many LDCs toward the emerging democracies of the Eastern countries. GLOBAL ECONOMIC DIVIDE There are almost 180 nations in the world and the world is clearly divided economically as at one side there is a cluster of rich and well to do countries and on the other side the collection of poor and economically deprived countries that are largely suffering from poverty problems. The central and eastern European countries are regarded as the economies in transitional phase but they have not achieved a full-fledged growth, these economies are distinct from the western developed countries as these economies are characterized by their low incomes among the other countries. In this region people are largely employed in agricultural and low productive activities rather than the modern industry like the developed countries and these countries tend to have large pools of unemployed or underemployed people. They tend to be export oriented and export products are mainly consist of raw materials, primary products while on the other hand, they are largely dependent on the imports for their capital resources and other needs and their business transactions are mainly with the developed countries instead of with each other. MACROECONOMICS Microeconomics is an outgrowth from the main stream of monetary theory that involves quite different lines of differentiation from the rest of economics. When we move to the economy as a whole then it is recognized that there has to be a balance between the rate of interest and the level of incomes then the relationship will determine the cost of capital costs of goods in terms of labor. And if any of the given elements in that equilibrium are changed then the function of the desired capital stock exchange will change the desired capital stock. But this approach cannot help in explaining how rapidly the differences between the desired and actual capital stocks are converted into actual investments. Generally there are two approached used by the theorists to explain the rate of the investment as micro economic analysis concentrates on optimizing the decisions of business firms while equilibrium analysis concentrated on the supply curve and supply conditions of capital goods industries. GLOBALIZATION AND THE ECONOMIC GROWTH While on the other hand, the United States enters the new geo-economic era with several setbacks as its economy is still in the position of absolute dominance and the accelerating decline of the competitiveness during 1980s resulted in the loss of market share by US corporations both locally and internationally, huge trade deficits and the rapid accumulation of debt owed to the foreigners. The current economic developments are only surface reflections of a much deeper historical process that is now underway to the globalization of economic activity all over the world. Globalization is easier to describe as it is a new, complex, dynamic, multi-facet, multi-dimensional and worldwide phenomenon that means different things to different people and countries as it evokes strong emotions because of its association with most of the world’s significant challenges a and opportunities. As defined by the experts, “globalization is the inexorable integration of markets, nation-states and technologies never witnessed before in a way that is enabling the individuals and corporations to reach farther, faster, deeper and cheaper than ever before and in a way that is enabling the world to reach into individuals and corporations than ever before” (Thomas L. Friedman, 2000) Supporters of globalization advocate for an open, free enterprise capitalist economy. For most developing countries and economies in transitional phase with a history of socialist government central planning and control and ownership of productive enterprises, it requires the evolutionary changes in the dominant ideology, mindset, institutional capacities and private-public partnership arrangements. The key challenge is to create and stabilize an environment for the development and progress of a competitive performance of the productive sector. MICRO APPROACH TO INVESTMENT In this investment approach when the firm changes the rate at which it adds to its capital stock, this rising cost is composed of two elements, one is internal and the other is external to the firm itself. The internal cost plans may arise out of plans, decisions, reorganization associated with the capital stock investment whereas the firm tries to grow more rapidly and encounters such cost increases and there is an optimum rate at which it can increase its productive capacity. On the other hand, the external cost increased when the result coming from the rising costs from the firms suppliers expand its capital stock. The external source of cost increase poses problems as if an assumption of a competitive economy is analyzed the cost of the equipment will be constant for an individual firm hence the firms are conscious of each other’s existence and collaborate by perceiving that the rate at which they add to their capital stock has implications for the cost of the capital goods to the industry as a whole. TECHNOLOGICAL PROGRESS The process of the economic development can be characterized by a transformational change of the innovative technologies being used in the production industry. Technological change in the developing countries has often been seen as a process through which the different techniques of production are invented that are used in the rich or developed countries first and then these technologies are then imported and adapted by the poor or developing countries for local use. Experimentation and learning process have played a major role in this process of technological change and transfer while on the other hand, the production technologies are chosen as off the stand and are often embodied in capital goods imported from rich or developed countries. The crucial determinants of technological and economical change are current and expected factor of product prices that poor countries need to devote few resources for the process of invention itself. CURRENT SCENARIO The Asian countries are extremely diverse in terms of economic size and natural resource development as Japan and Singapore have specialized in technology intensive products while on the other hand, Malaysia, Thailand, and other Asian countries are still exporting large amount of natural resource products to the rest of the world. The emergence of communist China with its specialized zones have induces an explosive export pushed growth such as the coal, oil and labor intensive industrial products (Gong, 1994). A major difference between China and other eastern countries is that China has been far more independent on foreign capital to generate exports particularly of manufactured goods. Today, China is upgrading its exports to medium tech products. Much of the Asian success is due to the geographical and historical factors as for many centuries main key Asian ports were integrated into the emerging capitalist world system as the result of European expansion in the area and cheap ocean transport (Dixon, 1991) The collapse of communist rule in the former Soviet union during 1989-1991 is probably the most dramatic event of the last century as four decades of confrontation between the two super powers have suddenly come to an end and the disintegration of the soviet command economy seems to be the final triumph of capitalism over the communism. Central planning and government monopoly that was initially capable enough toward industrialization lacked the technological diversity and adjustment capacity of a system based primarily on the capital and financial markets and free enterprise. Economic stabilization is developing countries are attempting to balance out the excessive or unsustainable economic activity to reduce the domestic inflation. Successful macro economics requires clear assumptions about financial institutions. As we are moving towards the more globalized world and dealing with semi-industrialized economy that is open to foreign trade but without financial breadth. “with more fixed capital stocks, commodity production in the short term requires labor and raw material. Labor use is determined from demand with adjustment in the money wage to inflation and growth reflecting labor supply response in periods of a year. The total cost of raw material is determined by world prices and of exchange rate which may vary in different regions at the same time as the money wage. There is ongoing inflation all over the world and the nominal interest rate is quite high. Moreover the interest rate changes affect the prices and output in the short term, because firms are dependent on borrowing to finance working capital to pay wages and raw material bills and to pass along their financial costs. (Jacob A. Frenkel, 1979) the nominal rate rather than the actual interest rates pushes prices even farther because of the fixed exchange rate and money wages. The only primary financial assets in the financial system are the central bank monetary liabilities and the physical capital stock. This condition is symptomatic of semi-industrialized countries where primary money in the form of government securities do not exist and a long history of financial inflation has affected the interest rates even higher than before. And because of the weak financial markets, firms are highly dependent on retained earnings of people for savings supply and the financial institutions that channel short term private savings of individuals into long term financial investments are not very active due to the fact that in the inflationary environment with imperfect market information, it is very risky for people to lend or long term periods even the banks concentrate on financing working capital and leave investment finance to companies already performing well in the markets. As a consequence of this, personal savings are too low the expected level both on average and at the margin level. Investment response to changes in output and the real interest rate differ from developed countries to developing countries because the retained earnings are the only flexible secure savings supply and for that matter the savings share from capital income will be high. CONCLUSION This impact of interest rate changes on the aggregate level throughout the macro-system have influenced and created differences in how stabilization policy works under stable Keynesian or output-responsive Fisherian investment demand. Despite all the financial planning, the degree of economic activity in the immediate postwar period turned out to be much greater than had been anticipated. REFERENCES 1. Economic Stabilization in Developing Countries, Book by William R. Cline, Sidney Weintraub; Brookings Institution, 1981. 528 pgs 2. Global Finance and the Macroeconomy, Book by Tony Makin; Macmillan, 2000. 202 pgs 3. Economic Development: Theory and Policy Applications, Book by Fidelis Ezeala-Harrison; Praeger Publishers, 1996. 284 pgs. 4. Macroeconomics and Monetary Theory, Book by Harry G. Johnson; Aldine Publishing, 1979. 214 pgs 5. Development Microeconomics, Book by Pranab Bardhan, Christopher Udry; Oxford University Press, 1999. 242 pgs 6. Dilemmas in Economic Theory: Persisting Foundational Problems of Microeconomics, Book by Michael Mandler; Oxford University Press, 1999. 216 pgs. 7. Liberalization in the Developing World: Institutional and Economic Changes in Latin America, Africa, and Asia, Book by Alex E. Fernández Jilberto, André Mommen; Routledge, 1996. 320 pgs 8. How Credit-Money Shapes the Economy: The United States in a Global System, Book by Robert Guttmann; M. E. Sharpe, 1994. 563 pgs. 9. Managing Globalization in Developing Countries and Transition Economies: Building Capacities for a Changing World, Book by Moses N. Kiggundu; Praeger, 2002. 346 pgs. 10. Economic Stabilization in Developing Countries, Book by William R. Cline, Sidney Weintraub; Brookings Institution, 1981. 528 pgs. 11. Economic Policies at Cross-Purposes: The United States and Developing Countries, Book by Anne O. Krueger; The Brookings Institution, 1993. 258 pgs. 12. Clarke, C (1957), The conditions of Economic Progress, (London Macmillan, Third Edition) pg 492-508 13. Kuznets, S (1974), Modern Economic Growth: Findings and Reflections, Nobel Memorial Lecture reprinted in Population, Capital and Growth, (London, Heinemann) 14. De Long, B (2002), Macroeconomics, (London Mcgraw Hill) pg 165-184 15. Weil, M (2004), Economic Growth, (New York, Addison Wesley), Chapter 1 Read More