Tuesday, June 4, 2013

Effect of International Political Economy on the developing nations

Introduction International political economy refers to the interchange between the world’s political affairs and the economics of the world. The international political economy according to Woods (2001) is shaped by various systems and institutions which have had different impacts on the world’s economy. The international political economy has mostly grown out of the realization that coordination and cooperation between countries would be very important for the various world governments as they were able to settle on mutually agreeable choices resulting from their overlapping preferences and interests (Shadlen, 2009). He went ahead to state that IPE is characterized by different views regarding the cooperation between the countries. There are the realists who are of the view that the dominant countries should be involved in the supply of the various goods; they could allow the other countries to enjoy their efforts freely or punish the countries that were enjoying the efforts freely. Secondly, the liberals who were in great support for cooperation and finally the constructivists who were concerned mainly with the various ideas, norms and how they would help in shaping the peoples’ world view. The liberal tradition gave birth to the free trade in which the various roles of the market exchange were accepted as both morally acceptable and economically efficient. The main underlying assumption was that the free movement of capital and free trade would help to ensure that the various investments would be made to the areas where they would be most profitable. Free trade was supported due to the fact that it allowed countries to benefit from its advantages such as resources, specialization and endowments (Woods, 2001). The open market and free trade according to the liberals would ensure and equitable and efficient distribution of goods and services throughout the world. The paper will discuss the effects of IPE on developing countries. A specific emphasis will be laid on the countries that gain and or lose in the free trade between the developing and developed countries. Effect of International Political Economy on the developing nations The approach of IPE that will be discussed in this paper is the political economy (Wood, 2001) which depicts the world as made up of different states that have competition based on vested interest. The core actors in this case are the interest groups which make up the domestic economy; they work to respond to the various changes which may be taking place in the international economy. It is imperative to say that the majority of the developing countries fall under the category of weak states. This group of countries has a very low choice regarding their various global economic relations and they also wield very little influence regarding both the enforcement as well as creation of systems that govern the international economy. There can be no better proof of this than the situation after the debt crisis of the ‘80s. Most developing countries were ‘forced’ or ‘coerced’ into liberalizing and deregulating their economies. A further example was noted by Rodrick (1999) as cited in Wood (2001) regarding the coercion of the agreement in intellectual property where practically billions of cash would be transferred to the developed countries under the guise of the rights of the protection of intellectual property (IP) of the various inventors. The developing countries are also affected by the dynamics of power especially by the powerful states, mainly comprising of developed countries, which will not be bound by the agreements which are created and signed. This mostly happens when the agreements go against the interest of the nation or state, then the will in most cases sweep the provisions under the carpet. The developing countries on the other hand have no cannot afford that luxury. Their interests are only looked after if it is determined that it will be of no detriment to the interest of the dominant countries. This has informed the many global protests at both the IMF and WTO meetings where protesters have made it clear that the poor and developing countries were getting raw deals as the international institutions were no after their interests but were for those of the powerful countries. The interests of the different countries are exaggerated by the various institutions that are given the power to implement the various provisions of the agreements that have been arrived at. The IPE through its instrument of international-domestic interaction has had a great impact on the economic policy making ventures of the different countries. This is through two main fronts as was articulated by Frieden and Martin (n.d.). The first scenario is where the global policies directly affect the various political economic preferences thus the interest of the domestic groups are directly affected. An example is the expansion of the operations of the World Trade Organization which led to the opening up of the economies of many countries thus significantly increasing the level of competition that they were facing. The free trade would also have different effects such as benefits for the countries that have labor surplus and for those that have capital surplus. The second consideration is so that they could increase the prospects that they had of reaching the global market. The IPE also has effects on the institutions thus it can make it untenable for the domestic economies to go on with the various policies which they might have been working with. This led to the obscurity of the various laws and regulation which were governing the world before the agreements related to IPE (Frieden and Martin, n.d.). There are countries that lost control of the national capitals due to the introduction and the working of the world economy. These changes were mostly noted in the developing countries which were highly characterized by the controls towards a situation where the capital and other factors of production could move more easily. Free trade between developed and developing countries The free trade between developed and developing countries was of utmost importance to many people as different people had different view of the costs and the benefits that it would bring about to the different economies. Benefits of free trade There are a variety of benefits that can be derived from free trade. However, its imperative to note that majority of these benefits are currently enjoyed by the developed countries which have the capital; higher flow of capital as compared to the developing countries. The first benefit is that of increased production which results from the competitive advantage that is created by an increased need for specialization (Bhagwati, 1994). Due to the free trade agreements, more and more countries have increasingly specialized in some given products thus are able to take advantage of the resultant efficiencies thus higher scales of production and an increase in the levels of output. This scenario is mostly enjoyed by the developed countries which have most of the production skills thereby leaving the developing countries in a situation where they import majority of the very expensive products which have been manufactured. The second benefit of free trade is the increased production efficiency especially regarding the allocation of the various resources. This issue again boils down to the capital that the various groups (developing or developed countries) can be able to command. In the case of the developing countries, they are mostly endowed with natural resources while the developed countries have the capital and ability to finance activities. Due to the increased global competition, the firms will allocate their resources to the most efficient investments while making use the technological advancement, available distribution and marketing channels and production methods which are highly innovative. This benefit can be said to be highly inclined towards the developed countries. There are also benefits to the various consumers especially in terms of the reduction in the prices of the various products. The consumers in both the developing and developed countries have recorded a lower price of the various products and services due to the free trade agreements which have been reached by the different countries (Cox, 1997). The high rate of competition between the different global firms ensures that the goods, services as well as input can be acquired as slightly lower prices thus leading to lowered products of the final goods. An example of this benefit is the reduction in the prices of the imported automobile by almost 35 per cent from the prices in 1998 before the enactment of the global free trade agreements. Moreover, there are foreign exchange gains especially for the countries that are mostly engaged in manufacturing as opposed to the countries which are engaged in the export of raw materials and non-refined goods (Helleiner, 1994). The countries engaged in final product manufacturing (developed countries) are able to sell their high value products to the other countries and engage in the import of the raw materials from the developing countries thereby affording them surplus in terms of the difference in the imports and the exports. There is also the benefit of free trade that is enjoyed by both the developing as well as the developed countries; employment. However, even in this the balance will be tipped towards the developed countries whose economies export more than they import (Cox, 1997). Many jobs are created in the manufacturing as well as service industries of the various countries of the world and thus have been considered as away through which the global unemployment can be dealt with. The jobs created by the increase in export activity have been explained as having a leveraging effect on the decrease of the import business. The free trade will result into a high number of firms who can be able to operate in the industry and thus will be able to lead to higher rates of employment amongst the people who are found in the different countries. Also, there is the higher economic growth levels which are directly associated with the free trade between the developed and the developing countries. There is a recorded high level of standards of living of the people and increased income levels mostly associated with the growth of the economies. This growth is brought about by the higher rates of competition between the firms, efficiency leading to higher rates of production and general increase in productivity. The effect of the economic great has been hugely felt in developing countries which are characterized by high poverty rates. The developing countries that embraced free trade recorded almost threefold growth in their economies. A classic example of where free market has led to a high rate of economic growth is China which was liberalized in 1978. The country has recorded a sustained growth of over 7 per cent and the levels of poverty in the country have also been dropping. Through the 90’s, the number of poor people in China have reduced from a high of 31 per cent to stand at 5.5 per cent. Costs of free trade The first major disadvantage that has been brought about by the free trade is the increase of dependency. This is due to the fact that even under the free trade and free markets, the richer nations always dominate the smaller nations (developing countries) to extents that the result can be the depletion of the resources that are found in these countries and thus technically slowing down the progress in these countries. This dependency comes about in the fact that most of the products that are produced by the developed countries are luxury goods which are expensive while the developing countries produce mainly basic goods thus they are imbalances in the Terms of Trade (ToTs) thus further fueling the dependency between the two countries; developing on the developed (Bernstein and Malkin, 2000). The dependency is even worsened by the perceived risks that the investors mostly from the developed countries have of the developing world. The other point of antithesis between the opponents and proponents of the concept of free trade lies in its regards to the poverty situation in the different countries. For the developed countries, it is universally agreed that there is a higher level of income associated with the increase in free trade. This is however not the case with the developing countries. The first point to support this assertion lies in the nature of the exports and the imports. Since majority of the developing countries have a lower rate o exports, poverty will continue to be a scourge in the countries as significant amounts of money are used in importing goods that the country can get from its exports; which mostly comprise of raw materials with very little value. Secondly, poverty is also brought about by the lower power levels associated with the developing countries, they cannot negotiate effectively with the buyers of their products thus in most cases, they are offered lower terms for the exchanges. The prices of the goods which are produced in the developing countries in most cases have lower value attached to them thus even the remuneration of the people who toil to produce these products will be low thus the poverty circle will continue even amidst increased production. No one put this point across better than Dieter (2003) who reported that the number of poorest people in the world had increased by 21 million from 1990-1999 (statistics from China excluded). The countries in the developing world were also disadvantaged as the theory of free trade states that the countries were to use their competitive advantages in the areas where they specialized. This is not the case in the developing countries where over 70 pr cent of the people depend directly or indirectly on agriculture. The developed countries cannot allow the developed countries to use their competitive advantages as they increasingly protect their domestic markets using various barriers which are no-tariff based. According to World Bank as cited in European parliament (2002), the developing world was established to be losing up to 63 billion US Dollars to the developed countries agricultural protectionism. The free trade that has been reached between the developed and the developing countries is sometimes very complex to monitor as the developed countries always require that the exports from the developing countries have a certificate of origin clearly indicating the countries where the goods have come from. The flipside of this is that, the developing countries have little capacity to administer all these and thus they are in most cases not able to access the markets (Dieter, 2003). The developed countries also experiencing problems related with unemployment. This is due to the fact that there are very high social standards in the developed countries thus most employees require very high rates of labor remunerations. Due to this, most firms migrate their operations to the low income countries so that they can be able to benefit from the low labor costs. In the US alone the effect was massive as over 1 million people lose their jobs every year as firms are shifting their jobs abroad coupled with the increased levels of imports (Bernstein and Malkin, 2000). The assumption of the comparative advantage that was advanced by the supporters of the free market where there would be a win-win situation has been replaced by absolute advantage where there is clearly no-win. Conclusion The free trade that has been brought about by the IPE has brought with it a variety of benefits and costs which have been very detrimental to the operation of the countries especially the developing countries that have a very low power especially in the policy formulation stages and after the policies are formulated, they do not have the ability to negotiate the terms. The only notable positive contribution that the developing countries have had is the increase in the rate of employment especially associated with the transfer of job opportunities by the firms in the developed countries to the low income countries so that they could take advantage of the low costs of production. This increase in development does not add any significant value to the eradication of poverty as the employees are paid very low levels of salaries. The other negative effects to the developing countries include increased competition for the resources and different imbalances in the various terms of trade and the different barriers which make the playing field very far from level. Bibliography Bhagwati, J. 1994, "Free trade: Old Challenges", The Economic Journal, 104(423): 231-246 Bernstein A. and Malkin E. 2000, “Backlash: Behind the Anxiety over Globalization; Many fear that free trade harms wages, jobs, and the environment” Business Week, 3678: 38 Cox, R. 1997, The New Realism: Perspectives on Multilateralism and World Order, New York: St Martin’s Dieter, H. 2003, “Chancen und Risiken fur Entwicklungslander”, Informationen zur politischen Bildung, 280: 37 European Parliament, 2002, Enquete Commission/German Parliament “Marktzugang fur Entwicklungslander” [online] Retrieved 01/31/2012 Frieden, J. and Martin, L. n. d., International Political Economy: Global and Domestic Interactions [online] Retrieved 01/31/2012 Helleiner, E. 1994, States and the reemergence of global finance: from Bretton Woods to the 1990s, Ithaca: Cornell University Press, 1994) Shadlen, K. 2009, Resources, "Rules and International Political Economy: The Politics of Development in the WTO", Global Development and Environment Institute, Working Paper No. 09-01 Woods, N. 2001, “International Political Economy in an Age of globalization”, In J. Baylis and S. Smith (eds), The Globalization of World Politics, Oxford, UK: Oxford University Press Please note: The papers shown in the Bibliography in German were translated through Google Translator on 01/31/2012 Appendix1: Free trade leads to fewer jobs and lower wages Impact on: All Republican Democrat Independent Family well being hurt Helped Hurt Helped Price of products Lower Lower Lower Lower Jobs in America Loss of job Loss of job Job loss Job loss Economy Slower growth Leads to growth Slower growth Slower growth Wages in America Lower Lower Lower Lower The table is part of a research that was carried out by Pew Research in America regarding the views of people concerning the free trade agreements.