Professional Documents
Culture Documents
An economy is the ways in which people use their environment to meet their material
needs. It is the realized economic system of a country or other area. It includes the
production, exchange, distribution and consumption of goods and services in that area.
Economy come from the Greek words Oïkos (house) and Nomos (rules) and hence
practically means house management.
• Primary sector → extraction of raw materials (corn, coal, wood, iron) 1% (GER)
• Secondary sector → transformation of raw materials to goods (textiles into clothing)
29% (GER)
• Tertiary sector → provision of services to consumers and businesses (cinema,
banking) 70% (GER)
• Quaternary sector → research and development needed to produce products from
natural resources (education in some cases included)
Trade:
Best example to demonstrate why people trade is Sweden. They got fish and they got
forests, but hardly anything else. Therefore they have to trade to satisfy their needs and
wants.
The Babylonians (Iraq) created many tools to facilitate trading. For instance writing was
invented as records of trading had to be hold. Likewise money was created, first
commodity value (gold, silver, copper) was used, where nominal and real value was equal,
than money as we know it today, where the value written on it is much higher then the
material value. (This just because we trust in it, having that value)
Trading was facilitated trough both, alliances and wars. The Greeks established
commercial routes along with alliances. The Romans fought wars to force and to secure
trade routes.
Throughout the Dark Ages (5th - 15th century) there was hardly any trade (except the Silk
road: a network for trade of high profitable products from Asia to southern Europe)
because of general impoverishment, insecure trading routes and because of different
currencies and different measurement systems. Out of this situation Mercantilism
established.
Mercantilism:
Mercantilism is on of the first economic theories in Europe (1500-1750). It states that the
wealth of a state is entirely dependent of the capital it holds (gold or silver
predominantly). It implies that states control very tightly the economy (planing,
production) by closing it and building up industries trough tariffs. Wars were extremely
expensive, wherefore the economies had to be strengthened. Spain, France, Britain and
Holland were very good in this at that time (state monopoly – centrally planned economy)
Trade was limited on exports to obtain more gold.
According to the Navigation Acts (starting in 1650) the colonies were limited to trade just
with GB and only on their or British ships and gave GB the control over the products
(redistribution, selling → taxes).
Mercantilism was main source of animosity and struggles in that time.
• all export of gold and silver be prohibited and all domestic money be kept in
circulation.
• where certain imports are indispensable they be obtained at first hand, in exchange
for other domestic goods instead of gold and silver.
• as much as possible, imports be confined to raw materials that can be finished [in
the home country].
This policy implies that mercantile countries must have in all circumstances a positive
trade balance (exports must be higher than imports) Note: This still today is an
advantage!
The idea of Colbert was to increase productivity and protectionism to strengthen the
economy and become self sufficient (Autarky = not dependent in times of war).
A perpetual (continuous) growth was needed to steadily increase the economy (exports,
furthering of raw materials). European markets were closed, therefore European powers
had to find ne markets and started the colonisation of the Americas. Europeans had
exclusive trade rights and used military power to maintain these rights.
Mercantilism today is represented by the four Asian dragons Singapore (3rd biggest
refiner), Hong Kong (financial metropole), Taiwan and South Korea (information
technology). In our economy we can call it a form of mercantilism when a government
gives projects to domestic companies.
With the start of the Enlightenment (focus on reason and individuality) in the beginnings
of the 18th century and under the influence of Hume, Locke, Smith and Ricardo
mercantilism started to vanish and to be replaced by liberalism and free trade.
Keywords:
empire-building, economic philosophy, state control over human behavior, acquisition of
colonies, satisfy needs of mother country, accumulation of wealth at colonies' expense,
colonies for trade without competition, regulatory policies, manufacturing prohibitions for
colonies (wool or iron industry), reliable market for colonies
Liberal theory:
With the Age of the Enlightenment (1700-1800) intellectuals started to criticize the
absolute power of the monarchies.
The Enlightenment allowed for the creation of a public sphere, reason was held for
supreme and therefore everything was open to criticism. The population became critical
and was opposed to secrecy and in favour of tolerance and what we now know as to be
modern politics and democracy.
Physiocrats:
Physiocracy (from the Greek for "Government of Nature") is an economic theory
developed by the Physiocrats, a group of doctors and economists who believed that the
wealth of nations was derived solely from the value of land agriculture or land
development, as it is the only factor which really produces something, all other sectors
are sterile. For them goods are like blood, they need to circulate.
Their theories originated in France and were most popular during the second half of the
18th century.
Their main leader is Quesnay, French physician and economist, who wrote the first essay
on economics: Le Tableau économique (1758). It was the first economic circular model
based on three classes, farmers and miners, merchants and workman and aristocrats and
landlords with the assumptions of free trade, price market, goods and money exchange
between classes and capitalism.
The Physocrats are strongly opposed to mercantilism as for them the wealth of a country
is the sum of all the individual wealth and they favour trade were the “natural price” is
settled by international competition. A natural price is beneficial for the farme who gets a
good wage, the landlord who gets a good rent, the state who gets taxes and the customer
who gets an optimal price.
In this terms the Physocrats distinguish between three types of economic players:
They think that all people are free to work and exchange, have the right of private
property, that the state should not intervene but just protect the natural right (human
rights) “Laissez faire et laissez passer“ and that the state should favour free enterprise.
Division of labour in this context was very important as it increased productivity. Less
skilled personnel was needed as the operations were easy and few so that workers were
than enabled to specialise on one kind of operation. Which resulted in benefits like in the
matter of free trade. The division of labour needed a high initial investment for new
machinery and the work became very monotone.
According to Smith labour is the main factor of production, but there are also:
• fixed: physical assets used for the production of goods (factory, machines)
• circulating: short-lived items used for the production of goods (resources, R&D)
Resulting from the production process there are three forms of revenue (wealth):
• Wages for workers: compensation for work, at least the subsistence wage, which is the
amount that is enough to make the worker survive during the winter, when prices are
generally high. The rest of the year the subsistence wage enables the worker to better
his situation. When the economy grows, the wages increase. Higher wages for some
industrialists mean higher productivity.
• Profits for industrialists: revenue of sold goods and services – the production cost
(machines → fixed capital and rent, raw materials, wages → circulating capital). Profits
are not guaranteed, they are just hoped for. They are the result of an investment and
a risk.
• Rents for landlords: compensation for rented land/buildings
Example:
GB can produce 100m of cloth in an hour and 90L of wine in an hour.
Portugal can produce 90m of cloth in an hour and 100L of wine in an hour.
Since the opportunity cost of wine is lower for Portugal than for GB, one can say that
Portugal has a comparative advantage in producing wine, so it should produce wine to
maximize the output.
Likewise the opportunity cost of cloth is lower for GB than for Portugal, which means that
GB should concentrate on the production of cloth to maximise output.
If the countries would do so then following would result:
Portugal would produce 18L of wine (3) and GB 12m of cloth (3). If these would be shared
in the same ratio per trade Portugal would have 13.5L and GB 4.5L of wine. Additionally
Portugal would have 6.6m and GB 5.4m of cloth. Both would gain respectively to the
starting quantities.
Today Liberalism has a different definition if Europe (no state intervention) than it has in
America (state intervention). The model is predominant throughout the world.
This economic model was contested by Marx and the 1929 crisis.
Causes:
• the accumulation of capital (period of low
taxation, high productivity → investment)
• through protestant growth capitalism was
possible as these could be rich other than
Catholics (Max Weber, The Protestant Ethic
and the Spirit of Capitalism)
• new technologies and innovations especially in
textiles (spinning mule), steam power (machines), chemicals and iron making.
• mechanization and standardization
• agricultural revolution (freeing workers form land trough machines (plough))
• demographic transition (more manpower for factories)
• patents and protectionism
• international organizations in charge of protecting patents
• strong nation states protecting industries
Effects:
• high increase in population
• strong economic development (factories opening all over the country)
• Cities and urban areas like London or the conglomeration of Manchester-Liverpool
were created (urbanisation)
• increase of wages as demand for labour increases
• creation of a strong middle class (which will take the place of the aristocracy)
• peasants became less (mechanisation of agriculture)
• strong increase of general wealth
The industrial revolution shaped the world we live in today. It created the modern
economies and lead to Taylorism (division of labour and wage system based on
performance) and Fordism (massproduction through assembly lines). The industrial
revolution provided economic, social and political progress. It created a new division of
the population, based on capital.
Capitalism
Marx argued that the capitalistic society was divided into social classes, mainly two:
and
Ideas and criticism: “Do you own capital or do you not?”, “Minority exploits majority”,
“History is a big struggle between social classes”
For Marx this situation, where the capitalists take away the created wealth from workers,
was not correct. To stop this extortion (räuberische Erpressung) the proletariat had to
takeover the means of production. This leads to a Dictatorship of proletariat: workers gain
class consciousness, and via proletarian revolution depose the capitalists to assume
control of a socialist state.
Gradually workers should then organize themselves. They should put all the means of
production together, hence bringing on communism, a stateless and classless society
Communism is only possible once the economy is fully capitalist and industrialized
(because once a communist system is established).
This ideology will have a certain amount of success throughout the XXth century in the
Russian and the Chinese revolution and is respected in the strong presence of communist
parties in many countries.
Note:
Although Karl Marx joined the Communist Party his ideas (Marxism) were not
predominantly communist but were meant to be an analysis and a critique of capitalism.
The Communist Party however liked his ideas which clearly were more social and adopted
them. Therefore we have to distinguish between a marxian, who is someone who agrees
with Marxist analysis and critique of the capitalist society, and a marxist, who agrees with
the proletariat dictatorship (communism).
It was the worst depression in history for the US and Europe shaking the foundations
of Western capitalism. At the depth of it, in 1933, one in four American workers were
out of a job and every fifth NY school child was malnourished and under weight.
Causes:
• strong economic growth in the US
• new technologies, new industries (General Electronics)
• establishment of a consumer society
• “cheap” money
• deregulation (less state intervention)
• creation of a speculative bubble
Effects:
• a depression that lasted over a decade
• demand for manufactured goods and services decreased sharply
• overproduction and the implosion of the speculative bubble → loss of value
• factories closed
• unemployment rose
• companies went bankrupt, leading to even more unemployment and a vicious cicle
The basis of his theory is the criticism of market economy and the invisible hand.
Demand is the centrepoint of Keynesian economics. If demand is low, the production will
be low, unemployment will go up and the general wealth will go down. The solution to
have economic growth therefore is a state sponsored support of demand. This was
explained by the following.
Keynes supports redistribution of wealth, as poorer people are more likely to spend extra
earnings than wealthier people. The lower the wage the higher the MPC will be.
For example, suppose you receive a bonus with your paycheck, and it's $500 on top of
your normal annual earnings. You suddenly have $500 more in income than you did
before. If you decide to spend $400 of this marginal increase in income on a new business
suit, your marginal propensity to consume will be 0.8 ($400 / $500).
Keynesian policies today:
Welfare state:
• redistribution of wealth (social welfare)
• progressive taxing
• “tobin tax” (financial transaction tax)
• healthcare
• market monitoring agencies
An example for this would be Obama's stimulus plan which provided the US economy with
787 billion dollars, divided as follows:
The purpose of the stimulus plan is to support demand and domestic consumption and to
maintain employment. However a lot of money went to trade partners and many people
saved because of the fear of further depressions.
Inflation:
Inflation is a rise in the general level of prices of goods and services in an economy over a
period of time. Consequently the value of a money diminishes.
5 types of inflation:
• Inflation due to demand (increase in offer)
• Monetary inflation (increase of the mass of money superior to the increase of the
real economy)
• Imported inflation (due to the imports of products which prices have increased)
• Inflation due to costs (production is more expensive)
• Budget inflation (financing public debt by the emission of money)
Inflation levels:
• 0-2% - normal inflation
• 2-10% open inflation
• 10-20% high inflation
• 20-...% hyperinflation
Hyperinflation:
• out of control inflation, occurs in extreme situations (1923 Germany)
• causes a strong economic downfall
• the only way to stop it is the creation of a new finance system (Dollarization)
See article
Stagflation:
• occurred during the 1970's in Europe/USA
• situation of high inflation
• situation of low growth
Traditionally inflation was accepted as producing wealth. The stagflation however was the
chance for a new economic school to impose itself replacing the thoughts of Keynes.
Neoliberalism:
Neoliberalism stresses the efficiency of private enterprise, liberalized trade and relatively
open markets, and therefore seeks to maximize the role of the corporate sector in
determining the political and economic priorities of the state.
Different than Keynes neoliberals thought supply should be supported. As increasing offer,
increases competition which has a decreasing effect on prices and a increasing effect on
sales and production, hence jobs.
This idea was justified by the assumption that the individuals inside a market know better
than the state. The state intervention just disturbs the natural course of the market and
therefore is responsible for crises.
However Thatcherism inspired reaganomics (economists that follow the hard-line policy of
US president Reagan) and soon conquered the world.
After the fall of the Soviet Union the system was imposed on Russia in a process referred
to as the “liberal big bang”.
Neoliberalism today:
Today Neoliberalism is a very important economic theory as the vast majority of
governments are neoliberal. On European basis this can be seen by the Maastrich
criterions which states that a states deficit cannot exceed 3% of budgetary deficit and
60% of national debt. On a worldwide basis it can be seen by the free trade agreements
(WTO), on the ongoing privatisations of companies and the main ideology of the World
Bank and the IMF.
Free Trade vs Protectionism:
International trade is the exchange of capital, goods, and services across international
borders. Not only because of its strong growth since the 1950's it is the best way to gain
wealth for liberals.
Protectionism:
F. List (1789-1846) said that
protectionism is essential for the
development of a country. (“educative
protectionism”)
Good example for this is the
Singapore cigarettes industry. The
government imposed tariffs of up to
400% for foreign cigarettes to make
sure that the own companies could
first settle before opening the market.
NAFTA (North American Free Trade Agreement) was established in 1994. The purpose was
to eliminate all tariffs, ensure mobility of labour and set up a dispute mechanism.
After World War II there was the necessity for new world organizations:
GATT:
The General Agreement on Tariffs and Trade was signed in 1947 by 23 countries. After
WWII there was a need to create more dialogue between nations and favour strong
cooperation between nations. GATT isn’t a direct consequence of the Bretton Woods
System but was created in the same dynamic.
In 1947 the Havana Charta was signed in order to create the international trade
organization (ITO). However the US did not ratify the Charta therefore the states created
the GATT which was a more informal organization (with the US).
Their purpose was to create a liberal and multilateral code of conduct wherefore it
organized rounds of negotiation to reach agreements in order to lift or lower tariffs on
goods. The purpose of these actions is to lower prices for consumers, increase
employment and productivity and favour employment in the sectors where countries have
a comparative advantage.
To secure fairness the GATT established the principle of the most favoured nation (MFN).
In international economic relations and international politics, most favoured nation (MFN)
is a status or treatment given by one state to another in international trade.
Hence if a country grants another one a special favour (such as a lower tariff for one of
their products) it has to do the same for all other WTO members.
However there are some strictly applicable restrictions so that countries can set up
individual trade agreements, give developing countries special access to their markets or
raise barriers for products considered to be traded unfairly.
WTO members treat each other as MFN.
WTO:
The WTO came to existence on the 1st of January 1995 under the Marrakesh Agreement.
At its creation, a 123 states were members. Today the organization counts a 153
members representing 95% of international trade. The headquarters are in Geneva and
the actual president of the WTO is the french socialist Pascal Lamy.
The WTO has the same mission as the GATT, however it has a wider field of action and
takes care of all the aspects of international trade (not only goods). The Organization’s
role is to act as an institutionalized forum where countries can reach agreements in order
to liberalize trade. Although there is a voting system, where every member has one voice,
votes are never taken, as decisions are taken by consensus.
On a generally biyearly period, a conference is organized where the leaders of all member
states get together in order to negotiate and reach agreements on new sectors of the
economy to liberalize. In Geneva in 1998 liberalization of electronic trade is discussed.
In Hong Kong in 2005 it was agreed to ban subsidies to export agricultural goods. The
WTO also still uses negotiation Rounds. The Doha Round for example tried to liberalize the
agricultural sector, unfortunately it was a failure. The negotiation rounds go on till a
decision is made.
The WTO also supported the signature and adoption of a series of agreements:
• GATT 1994 (goods)
• GATS (General Agreement on Trade in Services
• TRIPS (Agreement on Trade Related Aspects of Intellectual Property Rights)
Disputes:
The main role of the WTO is to act as a referee in cases of disputes between member
states. To do so inside the WTO there is the Dispute Settlement Understanding (DSU),
which creates the Dispute Settlement Body (DSB).
The DSB is composed of all the ambassadors of the member states. If a country thinks
another country is violating Trade Rules, it has the possibility of formulating a complaint at
the DSU. Multilateral approaches, and not unilateral actions, are favoured to settle Trade
disputes.
Direct contact between countries → creation of a mediation panel which gives report to
member states and to the DSB → DSB decides → country can appeal → Appellate Body
sets final decision
Sanctions:
The DSB and the Appellate Body don’t impose financial sanction. However the losing state
has to change its legislation in order to comply with WTO Agreements. If a country refuses
or takes too much time, the DSB can give the possibility to the complainant country to
take retaliatory measures (Gegenmaßnahmen).
Another dispute was the on on hormone beef from the US which Europe refused.
Benefits of WTO:
• pacification of trading relations through an internationally recognized organ
• absolute and comparative advantages for all
• according to neoliberals an increase in trade results in an increase in wealth for
everyone.
• wealthy countries benefit from trade
• developing countries have access to new markets
Critics of WTO:
The most outspoken and visible opponents to the WTO are alter-globalization groups
which have accused the WTO of promoting the interest of wealthier countries:
• They are the ones with the more powerful corporations who can engage lobbyists.
• The wealthier countries have the means to address all the issues put forward by the
WTO
• These groups (but not exclusively) criticize the little interest the WTO displays for
social and ethic dimensions. However there is a International Labour Organization
(ILO) which focuses on labour conditions.
• Economists have also criticized the WTO for only tackling the problem of trade
protectionism, as the WTO does not attack such issues as monetary protectionism
(trafficking the value of a currency has direct consequences on trade).
• The WTO is also criticized on a “philosophical” level, for elevating trade and wealth
as supreme values.
• More generally it is criticized for promoting neoliberalism (deregulation) as the only
way for economic development.
Bretton Woods Agreement:
In 1944 World War II was still in action when delegates of the Allied Nations met to sign
the Bretton Woods Agreement and decide on its system.
The Bretton Woods system established the rules for financial and economic relations
among the world's major industrial states in the mid 20th century. In first place it had the
purpose of rebuilding after WWII through currency stabilization programs (only in 1959 all
European currencies became convertible) and infrastructure loans. By 1946 the system
was in full operation through the newly established International Bank for Reconstruction
and Development (IBRD, part of the World Bank) and the International Monetary Fund
(IMF).
The chief features of the Bretton Woods system were an obligation for each country to
adopt a monetary policy that maintained the exchange rate of its currency within a fixed
value (plus or minus one percent). The currency had to be backed by gold reserves. This
became known as the Gold Standard (every unit of currency had to be backed by a unit of
gold).
"The nations should consult and agree on international monetary changes which affect
each other. They should outlaw practices which are agreed to be harmful to world
prosperity, and they should assist each other to overcome short-term exchange
difficulties."
IMF:
• Membership: 187 countries
• Headquarters: Washington, DC
• Executive Board: 24 Directors representing countries or groups of countries
• Total quotas: $325 billion (as of 3/31/09)
• Additional pledged or committed resources: $500 billion
• Loans committed (as of 9/1/09): $175.5 billion, of which $124.5 billion have
not been used yet
• Biggest borrowers: Hungary, Mexico, Ukraine
The goal of the IMF is to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable economic growth,
and reduce poverty around the world. They do so by providing policy advice and financing
to members in economic difficulties.
The IMF was important when it was first created because it helped the world stabilize the
financial system. Every state had to define the value of its currency with the US$. Every
currency should have a fixed value with the US$ which should not fluctuate more than 1%
on the Foreign exchange market.
The mission of the IMF is to help states reach that goal, with the use of the IMF pool.
At first member countries financed a pool. Their part in the pool (quota) is proportionate
to their GDP. From 1944 to 1971 the purpose of the IMF was to help countries stabilize
their currencies (within a 1% fluctuation). At that time a country could withdraw 25% of
its quota to secure its balance of payment without asking the IMF.
Then the country could borrow up to 125% of the value of its quota but with conditions.
These loans are supposed to help the central banks support the currencies of their
countries and keep them stable. So for the IMF worked as the central bank of central
banks.
By borrowing money, countries with a deficit in their balance of payment could stabilize
their currencies and their economy. They would later be in a position to reimburse their
loan. The purpose of having such an international system is to prevent countries from
brutally changing the value of their currencies and take unilateral decisions, therefore
protecting from another war.
That system came to an end with the end of the gold standard in1971 when president
Nixon suspended the convertibility of dollars in gold because of the high expensed in the
Vietnam War. Therefore in 1973 the IMF adopted a floating rate for currencies which was
made official in 1976 with the Jamaica agreement. This marked the end of the Bretton
Woods system and made it necessary for the IMF to redefine its purposes.
• Surveillance of economies:
• To maintain stability and prevent crises in the international monetary
system, the IMF reviews national, regional, and global economic and
financial developments through a formal system known as surveillance
• The IMF then provides advice, encouraging its member countries to
adopt policies that foster economic stability, reduce their vulnerability
to economic and financial crises, and raise living standards
• It provides regular outlooks of global economic aspects in various
publications
• Financial assistance:
• IMF financing is available so that member countries can correct their
balance of payments problems.
• A policy program supported by IMF financing is designed by the
national authorities in close cooperation with the IMF
• Continued financial support is conditional on effective implementation
of this program
• The IMF has doubled loan access limits and is boosting its lending to
the world’s poorer countries, with interest rates set at zero until 2011
• The IMF is the last organization countries turn to when they have
problems reimbursing their debts
• The financial assistance offered by the IMF is conditioned to the
implementation of a series of political and economical reform (fiscal
conservatism and privatisations)
• The assistance is never handed out in one payment: it is done
progressively
• Technical assistance:
• The IMF offers assistance and training to help member countries
strengthen their capacity to design and implement effective policies
• Technical assistance is offered in several areas, including:
• tax policy and administration expenditure
• management
• monetary and exchange rate policies
• banking and financial system supervision
• regulation, legislative frameworks, and statistics
Decision taking:
The Executive Board is responsible for conducting the day-to-day business of the IMF. It is
composed of 24 Directors, who are appointed or elected by member countries or by
groups of countries. For a decision to be taken, it must get 85% of the vote. The
importance of the vote (number of votes) of the country is dependent on the size of its
quota. The US represent 16% of the fund and therefore gets 371 743 votes
Germany represents 5,88% of the fund and gets 130 332 votes (Palau, 0,1%, 281 votes)
The board decides on the countries to help and negotiates the terms of the loan:
How much? How long? What conditions? And so the role of the Board is central in the
functioning of the IMF.
The Board of Governors, which has higher powers, takes little decisions. It consists of one
governor and one alternate governor for each member country. The governor is appointed
by the member country and is usually the minister of finance or the head of the central
bank.
The managing director of the IMF is Strauss-Kahn.
The IMF is clearly a neoliberal institution. It focuses on deregulation and low state
intervention. (stability?)
Examples: Big bang in Russia, Argentina crisis (had to sell all national industries and cut
public jobs.
The World Bank is different from the World Bank Group which comprises the:
• The two World Bank Organizations
• The International Finance Corporation (IFC) (1956)
• The Multilateral Investment Guarantee Agency (MIGA) (1988)
• The International Centre for Settlement of Investment Disputes (ICSID) (1966)
The Head of the World Bank Group (and the World Bank) is Robert Zoellick
Like the IMF, the World Bank has its headquarters in Washington, DC and a membership
of 187 countries.
The original role of the World Bank was to lend to countries so they could build
infrastructures which would help the economic development. (power plants, roads, canals,
dams). The purpose was to help countries devastated by the war to rebuild their
infrastructures. The burrowing states were supposed to reimburse their loans.
The role of the World Bank today is helping
developing countries.
The main task of the organization is to
fight poverty and to improve living
conditions for the less fortunate. The World
Bank wants to bring up the Human
Development Index (HDI) in developing
countries. The HDI is a composite statistic
used to rank countries by level of "human
development" and separate developed
(high development), developing (middle development), and underdeveloped (low
development) countries. The statistic is composed from data on life expectancy, education
and per-capita GNI (as an indicator of standard of living). (GNI = GDP + NET PAYMENTS)
It offers loans or aid to developing countries to help them promote education, healthcare,
agriculture and industry. However like for the IMF, the loans are conditioned.
The World Bank works on a triennial cycle. During the last triennial cycle (2005-2008)
$12,2 billion were distributed to developing countries. 20% as donations and 80% as
loans with no interest rate (just 0,75% commission). The main borrowers were India,
Pakistan, Vietnam, Ethiopia and Nigeria. The goal for the next triennial cycle is to
distribute $41 billion. More and more in microcredits.
This modern concept was developed by Muhammad Yunus and his Grameen Bank (Nobel
peace prize 2006). The concept was lending money to poor people who can’t borrow from
a regular bank with the purpose of supporting local development. (98% of the given loans
were paid back). Criticized were the high interest rates and the though rules and
obligations prescribed to borrowers.
The World Bank has also the possibility of borrowing money from financial markets in the
same way states do.
Not everybody gets money from the World Bank. The beneficiaries of loans or donations
are countries with a GDP per inhabitant inferior to $1085. The number of beneficiary
countries is around 80 and are mainly concentrated in the southern hemisphere. However
numerous post soviet countries benefited from World Bank loans.
Decision taking:
The highest authority at the World Bank is the Board of Governors which meets once a
year. The Board of Directors takes care of day to day affairs. They are 24 (5 for the main
contributors, 19 for the rest) who meet twice a week to vote on the projects which should
be funded. The voting power depends on the amount of shares a state has in the pool plus
the 250 basic votes.
As it is the case for the IMF, countries applying for loans at the World Bank must respect a
certain number of conditions:
• Good governance
• Fight corruption
• Promote democracy and state of law
• Engagement in structural adjustments
These conditions have also been sometimes labelled as the Washington Consensus.
Criticism:
There are multiple criticisms that focus on different elements of SAPs.
National sovereignty:
Critics claim that SAPs threaten the sovereignty of national economies because an outside
organization is dictating a nation's economic policy. Critics argue that the creation of good
policy is in a sovereign nation's own best interest. Thus, SAPs are unnecessary given the
state is acting in its best interest. However, it is important to consider that in many
developing countries the government will favour political gain over national economic
interests. In many sub-Saharan countries the political power has steadily increased with
economic downturn. Many of these poorest countries in the world however already have
tremendous debt.
It is however criticised that these western regulations undermine the countries own path
to development and democracy. As for example, the opening of countries to outside
investment allows U.S. corporations to build factories in impoverished areas. The
corporations are able to exploit the surplus of cheap labour, and usual lack of
environmental regulations to create goods at a lower price. As a result, corporate profits
rise and trade flows increase for that particular country. While this increases the GDP the
majority of the profit actually benefits the corporation and the country in which the
corporation is based. On the other side, many argue that the people employed by the
corporations are desperately in need of any work at all. It is argued that the alternative
forms of employment or life styles available to them are much worse.
Privatisation:
A common policy required in structural adjustment is the privatization of state-owned
industries and resources. Supposedly, this policy aims to increase efficiency and
investment, and decrease state spending. State-owned resources are to be sold whether
they generate a fiscal profit or not.
Critics, however, have condemned privatization requirements. When resources are
transferred to foreign corporations and/or national elites, the goal of public prosperity is
replaced with the goal of private accumulation. Furthermore, state-owned firms may show
fiscal losses because they fulfil a wider social role, such as providing low-cost utilities and
jobs. Many scholars have argued that SAPs and neoliberal policies have negatively
affected many developing countries. The privatization of water in Bolivia and the
privatization of the health system in Sub-Saharan Africa are few examples of such
negative implications. Privatization makes essential needs such as water and health care a
commodity, and those who are poor are unable to access such basic necessities because
they are unable to pay for these commodities.
Therefore, the privatization of a previously social service such as health care is actually
counter-productive to the purpose of structural adjustment programs.
Agriculture.
The agricultural, anti-land reform and food trade policies associated with SAPs have been
pointed to as a major engine in the urbanization of the global South, the ballooning of
megacities, worldwide migration towards the global North, and the growth in urban
poverty and slums.
They are also a source of contention for environmental activists. A large portion of SAPs
policy on agriculture focuses on the increased use of fertilizers and pesticides which harm
the health of local bodies of water and therefore fish populations. The runoff caused by
the overuse of fertilizers increases the amount of algae in local water bodies, causing
different scales of dead zones
Furthermore due to the conditions of SAPs, one of which is to devalue a nation’s currency,
a developing nation’s agricultural exports become more competitive because of their
devalued currency, which means a country is able to export more goods. However, the
nation also loses purchasing power which may not be able to be compensated by the
increase in demand for its export goods. Ultimately, the agricultural sector of a developing
nation will suffer and decline.
Environment:
Local environments can easily become casualties of pro-trade policies. Pro-trade policy
promotes an increase of industry adapted to Western needs. As a result of the new policy,
local industries begin to focus on producing cheap goods to sell on the international
market. The focus on creating the least expensive product often leads to environmentally
exploitative industry. As these new industries are often unregulated there are no laws
prohibiting this exploitation.
For example, emissions from factories are much less regulated in developing nations. As a
result, the environmental cost of producing a product like steel in China is much greater,
than it would be in the U.S. Another example would be the run off of chemicals or
pharmaceuticals into local rivers. In developing nations the pollution of rivers has become
a cause for international intervention.
There are just few regulatory clauses in SAPs, as the majority of the policy creators view
these regulations as a hindrance to trade and therefore to economic development. And it
would be unfair to forbid it to them after we have harmed the environment in our
development process.
The objectives of SAPs may be to reform the economical structure of impoverished or
developing nations. However, their lack of consideration for their influences on the
household level can foster the global issue of environmental degradation as farmers have
to undertake unsustainable measures. Potential deforestation and desertification are only
a few of the negative results of extensive cultivation.
Austerity:
Critics hold SAPs responsible for much of the economic stagnation that has occurred in
borrowing countries. SAPs emphasize maintaining a balanced budget which forces
austerity programs. The casualties of balancing a budget are often social programs.
The programs most often cut are education, public health, and other social safety nets.
Commonly, these are programs that are already underfunded and desperately need
monetary investment for improvement.
For example, if a government cuts education funding long term economic growth is at
risk. Similarly, cuts to health programs have allowed diseases such as AIDS to devastate
some areas' economies by destroying the workforce.
Economic globalization:
Economic globalization refers to increasing economic interdependence of national
economies across the world through a rapid increase in cross-border movement of goods,
service, technology and capital.
Economic globalization includes the globalization of production, markets, competition,
technology, and corporations and industries. Whilst economic globalization has been
occurring for the last several hundred years (since the emergence of triangular trade), it
has begun to occur at an increased rate over the last 20–30 years. This recent boom has
been largely accounted by developed economies integrating with less developed
economies, by means of foreign direct investment, the reduction of trade barriers and the
modernization of these developing cultures.
The two main factors in this globalization process are the internationalization of financial
and commercial connections and the internationalization of companies.
• Outsourcing production:
• The multinational corporation has its executive headquarters in one nation,
while production facilities are located in one or more other countries.
• This model often allows the company to take advantage of benefits of
incorporating in a given locality, while also being able to produce goods and
services in areas where the cost of production is lower
• Diversification:
• A third approach to the set up of a MNC involves the establishment of a
headquarters in one country that oversees a diverse conglomeration that
stretches to many different countries and industries.
• With this model, the MNC includes affiliates (a company related but not
controlled by the MNC), subsidiaries and possibly even some facilities that
report directly to the headquarters
• Contract manufacturing is also a key element (Nike's t-shirts)
Concentration:
This is process by which MNCs “unite” through different actions called takeovers:
• friendly (making an offer the other board of directors will accept)
• hostile (buying up shares till having a majority)
• Mergers (combination of two companies like ARCELOR-Mittal (steel)
In a merger R&D is much cheaper and you have the benefits of economy of scale. There
are to forms of concentrations. The vertical and the horizontal. The horizontal is the
acquisition of many companies of the same kind, while the vertical one forsees the
acquisition of companies that complement each other. (KFC owns everything from the
farm to the outlets)
Political:
Political globalisation refers to the increasing number and power of human associations
which influence or govern the world as a whole. It is also of significance that a series of
key inter-governmental organizations (IGOs) established in the post-war period have
become increasingly influential over the affairs of individual nations and the world. Prime
amongst these bodies are the United Nations (UN), the World Bank, the International
Monetary Fund (IMF), the World Trade Organisation (WTO), the Organisation for Economic
Co-operation and Development and the Group of Eight (G8).
However there are also non-governmental organizations (NGOs) like Amnesty
international which has a vast impact on politics. 2.2 million members in 50 countries help
political controversial issues to be discussed and eventually solved. Political globalization
hence leads to the general acceptance of certain values.
Sociological:
What happens in one country can have effects in very distant countries. When taking a
decision, leaders have to take in account the reactions of other countries. The process of
globalization is irreversible according to many sociologists, the interconnections being so
strong.
Geographical:
Globalization has an effect on geography: it creates “strongholds” which are regional
blocks which eventually will unite. This is most visible through the process of regional
integration like happened with the creation of the EU, the NAFTA and the Mercosur (south
America)
Positive effects:
Negative effects:
Globalization has generated significant international opposition over concerns that it has
increased inequality and environmental degradation. Many jobs in the western world have
been replaced by workers from developing countries, especially in agriculture.
Some also criticise the effect of globalization on culture. Along with globalization of
economies and trade, culture is being imported and exported as well. The concern is that
the stronger, bigger countries such as the United States, may overrun the other, smaller
countries' cultures, leading to those customs and values fading away. This process is also
sometimes referred to as Americanization or McDonaldization.
Sweatshops:
In many poorer nations, globalization is the result of foreign businesses utilizing workers
in a country to take advantage of the lower wage rates.
One example used by anti-globalization protesters is the use of sweatshops by
manufacturers. According to Global Exchange these "Sweat Shops" are widely used by
sports shoe manufacturers, in particular by Nike. There are factories set up in the poor
countries where employees agree to work for low wages. Then if labour laws alter in those
countries and stricter rules govern the manufacturing process the factories are closed
down and relocated to other nations with more business favourable policies, such as
Cambodia or Bangladesh. There are several agencies that have been set up worldwide
specifically designed to focus on anti-sweatshop campaigns and education of such.
Also electronic sweatshops have become a problem. These are call centres, often to be
found in India, where the employees have to face long work hours and an intense work
pace which results in health problems and alienation (Distanzierung) from family and
friends.
Income inequality:
The globalization of the job market has had negative consequences in developed
countries. High skilled workers like engineers, attorneys, scientists, professors,
executives, journalists, consultants are still able to compete successfully in the world
market and command high wages. Production workers and service workers in
industrialized nations though are unable to compete with workers in developing countries
and either lose their jobs through outsourcing or are forced to accept wage cuts.
This has resulted in a growing gap between the incomes of the rich and poor in developed
countries and is at its greatest in the United States.
Environmental degradation:
The removal of forest to make way for livestock was the leading cause of deforestation in
the Brazilian Amazon from the mid 1960s. Recently, soya has become one of the most
important contributors to deforestation in the Brazilian Amazon leading to great CO2
problems. In 2007, China overtook the United States as the world's biggest producer of
CO2. Only 1 percent of the country’s 560 million city inhabitants breathe air deemed
(erachtet) safe by the European Union.
At present rates, tropical rainforests in Indonesia would be logged out in 10 years, Papua
New Guinea in 13 to 16 years. But not just forests are running out, also a huge number of
different metals and other raw materials could cease to exist.
The world's ecological capacity is simply insufficient to satisfy the ambitions of China,
India, Japan, Europe and the United States as well as the aspirations of the rest of the
world in a sustainable way.
Food security:
The gradual change in diet among newly prosperous populations is the most important
factor underpinning (untermauernd) the rise in global food prices. From 1950 to 1984, as
the Green Revolution transformed agriculture around the world, grain production
increased by over 250%. The world population has grown by about 4 billion since the
beginning of the Green Revolution and most believe that, without the Revolution, there
would be greater famine and malnutrition than the UN presently documents
(approximately 850 million people suffering from chronic malnutrition in 2005).
It is becoming increasingly difficult to maintain food security in the developing world.
Remember:
− “The wealth of nations” by Adam Smith
− monopsony: a market with only one buyer but many producers
− “The Protestant Ethic and the Spirit of Capitalism” by Max Weber
− insider trading is the trading of a corporation's stock or other securities by
individuals with potential access to non-public information about the company
− ad-hoc means in this moment or from situation to situation (fallweise)
− the head of the ECB is Trichet
− “Brave new world” by Aldous Huxley
− Paul Krugman – New York Times
− the head of the European Council is Van Rompuy
− the head of the European Commission is Barroso
− the head of the UN is Ki-moon