Economic Globalisation and Developing Nations - Essay Example

Discussion on Economic Globalisation and Its Impact Upon Developing Nations Biologists incorporate a very neutral attitude towards their . Life forms are neither good nor bad; they simply have effects upon other life forms, all in the name of survival and evolution. Surprisingly, this same idea can be carried over into the area of economics. The management of assets and the buying and selling of goods can take various forms within different societies. The rules and methods ruling these transactions have evolved over time. Similar to the rules of survival for the animal kingdom, the methods for financial survival are not "good" or "bad" per se. Arguably, differing methods for pursuing the accumulation of material goods differ according to how societies were/are able to adapt. The goal within evolution, or what animals see as "good," is the ability to survive and promulgate their genetic code. What economists see as "good," within the world of finance is for wealth to accumulate, for products and services to increase in value and for all to profit and live happily ever after. This is the goal of financial evolution. It sounds so very, very simple, doesn't it Ah, but there is a catch. Given human tendencies, it is impossible for anybody to really have "enough." By its very nature, wealth is not a matter of what one has, but rather what one has in comparison to what everyone else has. We really don't want to have enough. Enough does not exist. We want to have more. This notion is fairly across the board for all cultures. Further, the animal kingdom is equal to the economic world concerning the degree of competition that is involved. However, over time, the competitors have less and less of an advantage over one another, and the playing field is leveled somewhat. Should one introduce a foreign element that has an unfair advantage-an animal with no natural predators and an unlimited food source, for example- soon the delicate balance of power between species is torn asunder. Similarly, such an idea can be presented regarding financial globalisation. Financial globalisation is nothing new. "One of the many definitions of financial globalisation is integration of domestic financial system of a country with the global financial markets and institutions. Enabling framework of financial globalization essentially includes liberalization and deregulation of the domestic financial sector as well as liberalisation of the capital account. As economies progressively integrate globally, pari passu the financial structures of markets and the world of finance change. Financial globalisation cannot be considered a novel phenomenon. Trans-country capital movements are centuries old." (Das, "Globalization in the World of Finance") Arguably, the very first European pioneer into the area of global finance is Jakob Fugger, son of a wealthy, self-made merchant of textiles. Jakob Fugger used his toehold in the textile industry to expand into finance, with trade posts that stretched from the Mediterranean to the Baltic. (familybusiness.com) Later, the rest of Europe caught on, and The Royal Exchange was created in London, providing a center for English financiers to trade both locally and internationally. By the nineteenth century, it became fairly evident that money in the form of paper currency had much less stability in terms of its trading power against foreign currency. The gold standard was therefore established, the reasoning behind it being that gold was much less likely to fluctuate in value; notes were redeemable for gold, both within a country's borders and internationally. This was intended to act as a guarantee that paper currency could be used anywhere, with a fairly similar value, provided these same countries both agreed to the gold standard and operated under it. (This was prefaced by the Bank Charter Act of 1844, under which the Bank of England declared itself the only legitimate source from which paper money was to be issued.) This standard is no longer used, however, and eventually gave way to fiat currency, which gives money declaratory buying power, irredeemable for anything tangible. World War I was an interesting time for finance; because of rampant forgeries of bank notes, the United Kingdom was following the trend of other nations, and was moving away from using precious metals as currency. Gold coins were officially removed from their status as legal tender, and in order to protect it from forgery, paper currency was becoming more and more intricate, with various colors and designs, and was now printed on both sides. Also, at this time bank notes were no longer redeemable for gold, therefore preserving the government's stock. Due to the fact that around the world, notes were becoming less and less exchanged for gold, the previous era of the gold standard collapsed. Some express outrage at this, claiming that they do not wish to base their currency simply on the word of the government, instead of any ability to exchange it for anything tangible. Obviously, what some could interpret as a lack of authenticity has had a considerable effect upon the economies around the world and their exchange rates with one another. The establishment of convertibility was later standardised by the Bretton Woods agreements, held in Bretton Woods, New Hampshire. Feeling the sting of the Great Depression, these agreements were aiming to stabilise the world's economy by taking the convertibility of each country's currency and attempting to give it a relatively "fixed" value among the values of other nations' currency. This system was completely defunct within a relatively short period of time (less than forty years.) Unforeseen by its creators, the United States discovered that it was actually accumulating debt, therefore casting doubt upon its legitimacy as the standard against whom all other nations' currencies should be judged. As with Great Britain, the United States (although at a later time) similarly agreed to suspend the exchange of its bank notes for gold, and some may argue that this may have also led to the demise of the Bretton Woods system. Recently, the subject of cross-border capital flows has been a very hot issue, given the seemingly unending financial growth of China. Its phenomenally huge labor force, which also happens to be relatively cheap, has created a booming economy for this country, as well as the fact that it does not participate in the World Bank's practice of price caps on its rate of return or rate-of-return policies, and it has skyrocketed in its global position as an economic force. The proportion of its inflows is truly staggering. The subject of cross-border capital flows has also gained popularity lately, due to some who have taken up the endeavour of debt-relief for Africa. According to the World Bank, "The World Bank's Board of Executive Directors today approved financing and implementation details for the World Bank's contribution toward the Multilateral Debt Relief Initiative (MDRI), which will cancel the IDA debt of some of the world's poorest countries starting on July 1, 2006, at the start of the Bank's new fiscal year. IDA is expected to provide more than US$37 billion in debt relief over 40 years. "'This is an historic agreement combining increased financing with debt relief, which will help poor countries meet the Millennium Development Goals,' said Paul Wolfowitz, President of the World Bank. 'I am particularly pleased that the Bank's shareholders have agreed on a funding package that will help to preserve the International Development Association's role as a cornerstone in development finance for the poor countries of the world.'" Convergence clubs have a similar goal in mind: the convergence of rates of return for various nations, thus establishing an economic equity among foreign countries. Whether this can be done or not is anyone's guess; it has been suggested that this convergence depends more upon initial income rather than economic growth itself, therefore making debt relief essential to the goal of economic convergence. The very heart of this essay asks the question, "Is financial globalisation healthy for less developed countries Does it pit more sophisticated financial institutions against people who simply cannot compete, and thus make them another resource for industrialised nations to exploit" In the short term, this may very well be the case, however, long-term, it seems that global pressure will also create a "conscience" to which all economic powers will be made subject. As civilisation progresses, humane treatment becomes more and more aggressively demanded towards others, and this is certainly true for the world of finance. It's well and good to say, "Oh, but people really want to be nice to each other!" and use that as a reason for economic equality being the ultimate outcome, but rather than simply relying on reasoning that appears nave, we need to also offer solid reasons for globalisation being healthy for developing nations. As previously mentioned in one of the opening paragraphs, wealth is relative. How much you have matters less than how much that is compared to what others have. One way in which this helps less developed countries, and evens out the monetary playing field is the fact that a relatively paltry sum of money for one profession in, say, the United States, is an absolutely princely sum for that same professional living in India or China. "When a real depreciation is expected, an investment boom is likely to develop if the import content of capital goods is high relative to the degree of capital mobility: the anticipated depreciation promotes flight into foreign goods. Conversely, with high capital mobility, the opposite investment pattern is likely to emerge, as the anticipated depreciation promotes flight into foreign assets." These factors create an upswing in the economies of developing nations, therefore giving them more buying power against competing countries, which ultimately affects interest rates and foreign exchange rates. Therefore, although facing some very daunting tasks-controlling capital account, foreign exchange rates and monetary policies-nevertheless, rather than simply focusing on the problem, we must keep in mind the goal: fair economic treatment of all. It is entirely possible for this ideal to become a reality, although it must be kept in mind that it will certainly not happen overnight, and that it will be a very messy, sticky, complicated process involving years, probably decades of negotiations and agreements between nations. Trust must be developed, and countries must be willing to help each other, especially in terms of cooperating in debt-relief strategies and humanitarian endeavours which have the ultimate goal of not simply handing out largesse to the masses of the world's poor, but rather undertaking true commitments towards establishing better educations, healthcare and other means for providing for themselves, such as access to clean, safe water and reliable supplies of food. Shortsightedness must be done away with for the well-being of all, and the global economy must prove itself to be a blessing, instead of a hindrance upon less-developed nations. WORKS CITED Berthelemy, Jean-Claude. "Convergence and Development Traps." Paper Developed for the World Bank ABCDE-Senegal Conference, Dakar, 7 January, 2005. April, 2006. "A Brief History of Banknotes." Bank of England, under Banknotes. April, 2006. http://www.bankofengland.co.uk/banknotes/about/history.htm Das, Philip K. "Globalization in the History of Finance." Global Economy Journal. Volume 6, Issue 1. April, 2006. < http://www.bepress.com/gej/vol6/iss1/2/> "The Family Business Pantheon: Six more family companies-large and small- that changed the world for the better." Family Business. April, 2006. < http://www.familybusinessmagazine.com/pantheon.html > de Bernis, Gerard. "Globalization: History and Problems." Ismea. April, 2006. < http://www.ismea.org/asialist/Bernis.html> Serven, Luis. "Anticipated real exchange-rate changes and the dynamics of investment, Volume 1." "Policy, Research, and External Affairs working papers ; no. WPS 562. Macroeconomic adjustment and growth." 1990. April, 2006. < http://econ.worldbank.org/external/default/mainImgPagePK=64202990&entityID=000009265_3960930083215&menuPK=64168175&pagePK=64210502&theSitePK=477872&piPK=64210520> Read More