Globalization of Trade - Regimes Managed by IMF and WTO - Essay Example

Globalization of Trade Heildroner explained capitalism as both a contribution of economic systems and politics. The economy of many nations worldwide is supported by the private sectors. Unfortunately, in the early days of industrialization, there were no enough private sectors entrepreneurs to take risks in large scale venture. Therefore, when International Monetary and trade regime supports globalization of private sectors, some the private sectors were able to access wider markets around the world and consumers are able to access a variety of goods and services. Financial support by the International Monetary is a debt relief to developing nations that result to an increased flow of direct financial investments and technology by the private sectors. Globalization is viewed as key force that would promote worldwide economic development while unrestricted regime trade serves to increase the inequality between developing and developed nations. When there is globalized trade, the developing countries are able to acquire skilled labor and modern technology that will aid in economic growth by dealing with problems such as unskilled labor and poverty. Integral of International Monetary and trade regimes in supporting a globalized capitalist economy ensured that consumption and production were not confined within national borders any longer. It also private sectors to increase production since good and services had gained local and foreign market. Globalization of capitalist economy made the developed countries experience so-called ’Golden Age of Capitalism’ between 1953- 1973 as per capital income growth rate in Europe rose from 1.3% to 4.1% while that of U.S rose from 1.8% to 2.5%. They had a spectacular economic growth performance (Jaffe 367). Regimes Managed by IMF and WTO Exchange rate regimes are the main regime managed by the international monetary and world trade organization. The International Monetary Fund has classified exchange rate regimes on the bases of the degree of flexibility of the arrangement or a formal or informal commitment to a given path of exchange rate into eight categories. Exchange Arrangement with No Separate Legal Tender, currency board arrangements, Conventional Fixed Pegs Arrangements, Pegged Exchange Rates within Horizontal Bands, Crawling Pegs, Exchange Rate within Crawling Bands, Managed Floating with No Predetermined Path for the Exchange and Independent Floating. This foreign exchange regime emphasizes the implications on the exchange rate regimes to the independence of monetary policy. However, monetary policy does not exercise total independence on exchange rate policy under exchange rate regime. Monetary policy decisions are based on country’s positions with or without explicitly imposed foreign exchange rate policy constraints. The exchange rate under independent floating is market determined. Intervention of foreign exchange in the market aims at moderating the rate of exchange and preventing occurrence of undue fluctuation in the exchange rate. Under independent floating exchange rate regime, monetary policy is independent of exchange rate policy. Managed floating or dirty floating has a lower degree of flexibility compared with independent floating. Through active, direct or indirect intervention of monetary authority, it influences movement of exchange rate to counter long-term trend of exchange rate without specifying a predetermined exchange rate path or without having a specific exchange rate target. Arrangement of exchange rates within crawling bands, currency is maintained within fluctuation margins of at least + or -1% around a central rate and is changed periodically at a fixed rate or in response to changes in selective quantitative indicators. The function of band width that is a result of adjusting crawling ban determines the degree of flexibility of the exchange rate. The effort to maintain exchange rate within the band width imposes constraints on monetary policy. For example, the lower the band, the lower the degree of independence monetary policy possess and the vice versa. Conventional fixed peg arrangements areexchange rate regimes where a country formally pegs its currency at a fixed rate to another currency or currencies. Currencies of major trading or financial partner form a basket of currencies and reflect the geographical distribution of trade, services or capital flows.The international monetary keep the fixed parity through direct intervention such as sale or purchase of foreign exchange on the foreign exchange market and indirect intervention through aggressive use of interest rate policy, foreign exchange regulations or intervention by other public institutions. On the other hand, non-fixed pegs are more flexible than fixed pegs because they do not peg currency to another currency or a basket of currencies. The currency under pegged exchange rate within horizontal band is maintained within margins of fluctuation of at least + or -1% around a formal fixed central rate. Crawling pegs allows currency to be adjusted periodically in small amounts at affixed rate or in response to changes in selective quantitative indicators such as majortrading partners and differentials between the target inflation and expected inflations in major trading partners. Crawling rate can be set to cause inflation when there is lot money with the public in order to stabilize the capital flow in a nation. The effort to maintain crawling pegs causes constrains to the monetary policy. Currency Boards refers to the monetary regimes based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed rate. It implies that, domestic currency is issued against foreign exchange and is fully backed by foreign assets, eliminating traditional central band functions such as monetary control and lenders of last resort moreover; many assets and foreign reserves of the people in the republic also back it. When it we refer to the exchange arrangements, there are two types of exchange arrangement with no separate legal tender. Formal dollarization that allows currency of another country to circulate as a sole tender and the other is shared legal tender (Machete 300-325). Different Impact of International Regime Globally Through trade globalization, developing nations had expected it would facilitate accessing market for their agriculture and textile products a sector that had ben highly been protected by Multi-Fiber Arrangement (MFA) in which developing country had comparative advantage. Unfortunately, the northern countries distorted the hopes of the developing countries by enormously offering financial support to their famers. There was an Agreement on Subsidies and Countervailing Measures (SCM) that allowed variousexemptions to reduction commitments thus permitting a considerable number of agricultural subsidies maintained in Northern countries. This action acted as a loophole that allowed Northern countries to re-structure their support for agriculture. Subsidies of northern countries on their farmers made it hard for developing countries producers to compete with those of developed countries.For example, every year $4 billion was given to 25,000 American peanuts farmers as subsidies to enable them to produce a lot of peanuts at a reduced cost.Subsidies given to northern farmers by their countries did not only displace agriculture in developing countries but completely suppressed it.Both effects directly impaired farm income in poor countries discouraging farmers to continue with agriculture. This continued giving the northern countries the benefit to be super power in agriculture. Use of poor services by developing countries despite the World Organization Trade has also been a barrier to developing countries to benefit from General Agreement on Trade Services (GATS) as they suffer from unskilled labor and thus have a comparative advantage in less skill-intensive products while developed countries are rich in skilled labor. Therefore, advanced economies have pressured for liberalization in service sector of their interest especially in financial, information and telecommunication services. Non-tariff trade barriers used by developed countries cause constrains on the access of market for developing countries. Although World Organization Trade has consistently addressed these kinds of barriers, progress have ben limited. For example, India had an average of 71%. It was reduced to 32% while U.S average rate fell from 7% to 3%. This implied that in the case of imported from India that formerly cost $171 would now cost only$132 which is a significant fall. As a result, southern countries have often found themselves using non-tariff barriers when they try to access market for their goods and services in the northern countries particularly dumping duties and technical standards (Wang 137-161). Works Cited Machete, Juan A. (2004): Developing Countries in the WTO Services Negotiations. New York: Cambridge press, 2004. Print Heilbroner, Robert.The World Philosopher: the Lives, Times and Idea of Great Economic Thinker. New York: Schuster publisher, 1953. Print P. Wang. Economics of Foreign and Global Finance. London: New Times Publishers, 2009. Print Read More