Problems and Policies of International Economy | Free Essay Example

Problems and Policies of International Economy

Words: 1308
Topic: Business & Economics
Updated:

Although multinational corporations bring a number of advantages to developing countries, they pose various challenges and problems. Although they provide jobs to populations, these are low-skilled and poorly paid. There is repatriation of the profits earned from the businesses they operate.

Because most of the companies are concerned with more business activities and less in population welfare, they always look forward to decreasing the paid wages which a times involve loss of jobs. In addition, they may pull out any time for search of greener pastures and hence have no guarantee for long presence.

The most-favored-nation (MFN) defines the concept applying to GATT (General Agreement on Tariffs and Trade) member countries where, if one member country imposed trade restrictions, this imposition applies to all the GATT members.

If a state offered certain treatment to the most-favored trading partner, the treatment would apply to other members of GATT. GATT is guided with the principle of reciprocity where any reduction of tariffs by a state to another is matched in return-and nondiscrimination (Thomas, 2006).

The international community along with the International Monetary Fund (IMF) and World Bank and other international organization created the General Agreement on Tariffs and Trade (GATT) after the World War II.

The four principles of GATT includes; elimination of certain nontariff barriers and subsidies; reduction of tariffs 38% for the developed countries; application of more effective disciplines to agricultural trade; and the expansion of GATT principles to cover areas like intellectual property rights, investments, and trade in services (Thomas, 2006).

The Special Drawing Rights (SDRs) are form of international currencies which are stable in value and liquid ‘paper’ gold and can be used to settle international transactions.

They were created in 1969 by the IMF in order to meet international liquidity. If there is an increased demand for international liquidity, amid gold inelasticity, the demand can be met by augmenting the supply of the SDRs. They can be stored as a store of value like gold, and used to settle net deficits in international trade (Subrata, 1995).

Declining performance of the US dollar has been explained in the past, in terms of the country’s budget deficit. The current account deficit-the measure of the trade gap, has also been used to explain this decline. The decline in the trade and investment between the United States and the rest of the world can cause the dollar to perform poorly because there would be a larger current account deficit.

The deficit can happen if the American exports decrease in demand while the country continue to import more (MacNeil/Lehrer Productions, 2004).

The decline in the value of the dollar and the current account deficit can be explained on the basis of the drop in the capital flows into the United States when investors reach their desired holdings. “The capital flows needed to maintain an increased dollar share are much smaller than those needed to achieve it” (Baldwin, 2007).

Although protectionism seeks to protect domestic jobs and industries through the granting of monopoly to domestic producers and providers, it also negatively affects export industries and industries that rely on imports to make their goods.

Protectionism also may negatively affect relations between countries as members who are discriminated latter on may retaliate. In the event of economic challenges in the United States, the country should encourage more trade with partners through free-trade agreements.

The Developing Countries in the World Economy

International trade has been perceived as reinforcing the unequal resource endowment between countries and especially with skilled and non-skilled labor. In the least developed countries, factors of production are not fixed (which have been said to be crossing borders contrary to the old theory (Rojas, 1998)), and the countries’ trade is not likely to shift to more capital-intensive forms of production and the associated benefits.

Perfect competition principle is violated in the fact that there are risks and uncertainty, presence of product differentiation, increasing returns and the presence of monopoly and oligopoly powers. International trade however must be seen as establishing a field for countries to trade with others, and encouraging movement of goods and improving relationships among countries.

International trade does not only achieve economic goals but also important political and social goals and therefore must be awarded value. Countries are driven to trading with one another by their comparative differences in technology, supply, production, and demand among other things and thus the differences are important to maintaining trade.

The New International Economic Order is a set of proposals and recommendations on the changes to be carried out in the international system to allow representation of less developed countries, and enhance fairer terms of trade and more liberal terms for financing development.

Although many of the demands seek to have the developing countries receive favors from the developed countries such as establishment of mechanisms for technological transfers to developing countries separate from capital investment, redeployment of some industries from developed countries to the developing ones, attainment of official assistance to reach the target of 0.7% of GNP of the developed countries, some of the more issues are serious and need be looked into more carefully.

Such example is the proposal to have development aid linked to creation of the IMF and the SDRs (Special Drawing Rights) (Looney, n.d.). Countries cannot expect to get some of the demands in a competitive environment but must work out their own modalities to solve their challenges.

Foreign aid has been effective in accelerating development in developing countries although it has been plagued with various issues. The funds have initiated and supported different developmental projects and helped raise the livelihoods of many in the developing world.

However, overdependence of the foreign aids has been a great problem to developing countries and may be perceived as contributing to lack of enough strategies by the developing countries to solve the problems in their countries for example implementing enough strategies to raise funds to fund developmental projects.

Foreign aids have been used to influence countries to make important economic and political decisions in order to favor certain trends and policies, which mean that they do not act independently even when it would have been necessary to make sound developmental decisions.

Although import substitution and export promotion can be applied in an effort to achieve economic development, import substitution is replacing the imports for simple consumer goods with domestic products and/or expanding domestic production to more sophisticated products (Todaro & Smith, n.d.).

The advantages realized could be protection of domestic industries from competition and reduction of money expenditure for importing goods unnecessarily among others. Export promotion is the strategy applied by a country for boosting export for domestic products into the international market to improve trade with other countries, acquire more foreign exchange and improve trade relations between countries.

The Millennium Development Goals are a set of 8 prospects to be achieved by 2015 that were developed to respond to world’s development challenges. These were developed from the actions and targets in the Millennium Declaration adopted and signed in September 2000 UN Millennium Summit. Issues addressed in these goals include gender equality, poverty reduction to a half, reduction of child mortality rates among others (UNDP, n.d.).

The developing countries should not be relieved of the debt burden because of a number of issues; first, relieving them is not an end to relying on these debts. These countries will continue to rely on the debts which mean the debts are likely to accumulate again.

Many of the countries still face administrative and political challenges and in order to solve some of these problems which largely impact development, they need to be reminded of the responsibility to paying these debts rather than relieving them. Further, the requirement on the need to carry the responsibility to pay is in one way a factor that could make them not mismanage resources in their countries.

References

Baldwin Richard. Is the United States headed for double bubble trouble? 2007.

Looney Robert. New International Economic Order.

MacNeil/Lehrer Productions. Falling Dollar. December 2, 2004.

Rojas Róbinson. 1998. The poverty of international trade theory.

Subrata Ghatak. Introduction to Development Economics. (3rd Ed.). Routledge, 1995

Todaro Michael & Smith Stephen. Economic Development.

Thomas M. Leonard. Encyclopedia of the Developing World. Taylor & Francis, 2006

United National Development Program. About the MDGs: Basics.