Since the creation of the monetary system nations have executed imports and exports to trade goods. We have seen countries surge in growth as their exports exceeded their imports (Japan), we have seen countries falter as they continuously import more goods than they export (Unites States of America), and we have seen nations refuse to join any form of global trade simply surviving on their own domestic production (North Korea). With all these situations we witness importing, exporting, and domestic consumption, but which is best, and for what country? To answer this question we must define some key terms that relate to global trade, and to the benefits and drawbacks each country experiences.
Less-Developed Countries (LDCs): Do not have advanced technologies that can lower production costs, a well-developed infrastructure that can lower transportation costs, or institutions that lower transaction costs or make investments particularly safe.
Export-Oriented Economy: An economy based largely on the income incurred by exports more than any domestic consumption.
World Trade Organization (WTO): The successor organization to the General Agreement on Trade and Tariffs (GATT) that seeks liberalization of international trade and investment and generally promotes globalization.
Import-Substituting Industrialization (ISI): An economic theory employed by developing or emerging market nations that wish to increase their self-sufficiency and decrease their dependency on developed countries. Implementation of the theory focuses on protection and incubation of domestic infant industries so they may emerge to compete with imported goods and make the local economy more self-sufficient.
Now that we have defined the key terms relating to global trade, and the benefits and drawbacks towards different countries, we may now begin to delve into the exact reasons as to why there is so much debate about which system works best. Let’s begin with the drawbacks of an export-oriented economic development path for LDCs. There are always benefits and drawbacks to each system, the trick is to develop the most logical system in which the majority benefit and any minority that experience drawbacks can be compensated accordingly. For an LDC to develop an export-oriented economic policy there are many drawbacks, one being that if the LDC does not have domestic infrastructure and a strong domestic economy with proper policies and regulations, the export-oriented economic policy will wreak havoc on the domestic market, as the LDC designates the majority of its ecological resources to exporting the goods in return for more competitive global markets. This creates a slew of problems domestically for the LDC, as citizens are faced with higher prices, because of the shortage of goods, the income that is received from the exported goods is reinvested into the exporting chain to increase production, and only a minority of the LDC’s population actually benefits from the subsequent revenue streams.
An alternative to this economic policy, is one that provides slower growth accommodated with domestic economic security, and provides for domestic development of infrastructure, institutions, and other essential elements imperative of a prosperous economy. This economic policy is known as, barter trade, and has been used since the dawn of the human species. This concept of barter trade provides for LDCs that are beginning to enter the global market to trade (import and export) with other counties, to all-the-while operate on a balanced current account. This policy provides for slow economic growth, but immediate economic development, as the basic necessities for a society are met in trade of food, infrastructure supplies, and other goods that will promote prosperity. This policy is based completely on a long-term development plan, that does not consider short-term growth important. It could be considered a policy that fits between that of export-oriented economic policy and import-substituting industrialization, both of which implement an extreme of either importing goods or exporting goods, neither of which view long-term development as an important issue. But just like any system it has benefits and drawbacks, the largest drawback being that with bartering you can only supply your domestic market with so much of imported goods. This suggests that if an imported good is imperative to standard-of-living of the domestic population, but you can only acquire so much of it the population will suffer, because with barter trade a balanced current account must be kept at all times -- meaning that there is no trade surplus or deficit allowed. This drawback may result in a lower standard-of-living while the barter between the goods is adjusted to include the larger population, but it can also be considered an indicator good regarding the overshoot level of population in relation to the necessary good, suggesting the implementation of citizen approved population control parameters.
No system is perfect as we have witnessed throughout history, but logically adjusting systems as soon as possible to avoid oscillated delays is the best way to naturally adjust to incorporate the shifts in the system. Reform is continuously necessary within a system, and finding an equilibrium within the system can prove to be improbable, but not impossible. Consider the many systems within our complicated world, many of which have ceased to experience reform since their creations, resulting in many problems now surfacing as a result of the oscillated delays we did not, and could not register due to our mis-educated ignorance.
Thank you for your interest, please comment and subscribe.
Onward,
Hayden van Andel
Have you ever heard the term, competitive advantage? How about, comparative advantage? Mobile capital? What about the IMF or the World Bank? I am sure some of these terms light up in your minds, like candles seen off in the distance. Unfortunately for a large population of Earth’s human species these terms contain no meaning. Now, not everyone has had the opportunity to study the concepts that relate to these terms, however these terms (besides the IMF and World Bank) play integral roles in the operation of our spaceship Earth. So let’s begin this discussion by defining these key terms listed above and the how and why they relate to your lives.
Absolute Advantage: A country has an absolute advantage if it can produce the good in question at a lower absolute cost than its trading partners.
Comparative Advantage: If it can produce the good in question more cheaply relative to other goods it produces than can its trading partners, regardless of absolute costs.
David Ricardo: Was a British political economist and stock trader. He was often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill.
International Monetary Fund (IMF): An international financial institution composed of member nations and created at Bretton Woods, New Hampshire, in 1945. Originally designed to focus on short-term balance of payments financing to promote international economic stability, in recent decades it has strayed from its charter.
World Bank: An international financial institution composed of member nations and created at Bretton Woods, New Hampshire, in 1945. Originally designed to focus on long-term lending to promote the development of underdeveloped countries, in recent decades it has strayed from its charter.
Now that we have defined these key terms we will be able to continue our discussion. When we discuss comparative advantage between countries, we never seem to consider the capital that is invested. This capital is usually considered mobile capital, but with comparative advantage between individuals capital mobility is detrimental to this perceived advantage. This is because as an individual who holds a comparative advantage over another can complete whatever tasks more efficiently than the other, mobile capital suggests that the productive energy and capacity of the less efficient individual can be transferred to the absolutely more efficient individual. This is not the case in situations of comparative advantage, where capital must be immobile for advantages to be expressed. An example of a productive resource that is not mobile would be, human capital in the form of labor without the skills. With just the labor aspect human capital cannot become mobile capital seeing that different jobs require different skills, which require trainings and education. The example of human capital being immobile does not prove the last statement wrong in relation to comparative advantage and capital immobility, because if you look at it, one nation that produces sugar more efficiently than another nation which produces coffee more efficiently than the last, the two nations cannot have capital mobility with their human capital seeing that only a limited number of workers can produce both coffee and sugar, the capital becomes immobile as long as comparative advantage is in effect.
Continuing along with the concepts of comparative and absolute advantage, we can now see a pattern growing within global trade and expansion. There are two terms that are used to discuss global trade, one is globalization the other is internationalization. Internationalization refers to the increasing importance of relations between nations: international trade, international treaties, alliances, protocols, and so on.The basic unit of community and policy remains the nation, even as relations between nations, and between individuals in different nations, become increasingly necessary and important. Globalization refers to global economic integration of many formerly national economies into one global economy, by free trade, especially by free capital mobility, and also, as a distant but increasingly important third, by easy or uncontrolled migration. Globalization is the effective erasure of national boundaries for economic purposes. National boundaries become totally porous with respect to goods and capital and increasingly porous with respect to people, viewed in this context as cheap labor or in some cases cheap human capital. The importance of these two separate concepts is, with internationalization we simply trade across borders but continue a strong national protection, whereas globalization calls for complete unity and transparency of all borders. This leads to economic unity, governmental unity, and ecological capital unity, and example of this is the E.U.
With all the global trade, advantages, mobile and immobile capital, and continuing diversification of national borders, it is becoming relevant that we must decide what is best for a prosperous society and planet, internationalization or globalization?
Thank you for your interest, please comment and subscribe.
Onward,
Hayden van Andel
