The expansion of domestic money and credit, as well as government expenditures create a situation where the government is obligated to borrow money from international organizations, in order to keep the national reserve at a good level, causing an increase in foreign debt.
The economic conditions are all tied to each other, and that was shown in the Mexican Crisis. During the 90s this country’s situation was stable after a few programs that took it through a growth in international trade. However, ‘at the end of 1994, a year after NAFTA’s approval, the Mexican economy was in a financial crisis’ (Ros & Lusting, 2000, p.4)
The crisis was a consequence of inadequate economic circumstance; the overvaluation of the peso was on top of them, with the large volatility of capital inflows.
The capital inflows as stated before, led to the growth of national banking credit. “Part of this credit expansion was channeled to the finance of new investment, but another, and possibly most significant part, ended up fueling a private consumption boom in the midst of an artificial atmosphere of bonanza.” (Ros & Lusting, 2000, p.4) Under these circumstances, it can be deducted that the growing indebtedness of households implied a decline in household savings, which helped to cause a terrible economic scenario in 1994.
As a result of internationalization and overvaluation of the currency, this country had a deficit in current account. This contributed to the decrease of profit of national companies. This adverse scenario caused an expansion of bank credit, as a consequence of the fall in business savings.
The implications of all these events were the continuous accumulation of external liabilities. On December of 1994, the Mexican government was unable to overturn its debts, so they where forced to devaluate the peso, in order to reestablish the economy.
- Social Problems
2.2.1 Unemployment
“In developing countries the major concern is that economic liberalization, motivated by the desire to benefit from the growth of the world trade and investment flows, will generate high transitional unemployment and cause an increase in inequality.” (Lee, 1996, p.490)
When the current account is liberalized, foreign firms can sell their products in the domestic market. This situation confronts local firms with foreign competition. Consequently, domestic competition may drive a firm to reduce employment in order to be more competitive in the market.
This situation occurred in Mexico. “The real appreciation of the peso resulted in slow economic expansion, which affected especially the tradable goods sectors. This slow expansion implied sluggish job creation, especially in manufacturing”. (Ros & Lusting, 2000, p.7)
2.2.2 Wage and Income Inequality
The growth in international trade contributes to productivity and increases the average wage levels. ‘However, even as international trade increases the overall levels of wage, it may also increase inequality’. (Taylor, 2002, p.35)
Open trade can yield many economic benefits to nations, but those benefits are not evenly distributed among the populace. The danger is that growth, which benefits only a small minority of the population, increases inequality and can lead to social disintegration. This in turn ultimately affects the standard of living in a society.
Income inequality seemed to increase for several reasons. For example, in Argentina, productivity increased in the traded-goods sector affecting all skill levels, especially unskilled workers. ‘The reason for this situation was attribute to the rising income concentration in the non-traded sector, along with greater skill intensity of new investment and to the rise of unemployment in traded goods’ (Taylor, 2000, p.47)
Colombia also suffered this phenomenon. People with low skill levels suffered real-wage reductions or lost their jobs as consequence of the bankruptcy of many small companies. On the other hand the sectors of skilled workers were less affected by this economic situation and their wages were not affected.
- Politics Problems
Developing countries, through economic growth, have to affront political problems, which can cause instability. Two of the major problems are:
- Eradication of Free Trade Barriers
Under this process, the governments need to change their legal system in order to promote international participation in their economy. The new economic environment can cause, to national enterprise, a discouraging scenario. Their safe position in the market is abruptly interrupted by the presence of international firms, and in most cases they are not ready to adopt it.
The opening of traditional areas of the state action to the private sector is part of the route that these countries had to follow. The private sector has management priorities different to those of the government, caring more about profits. In order to be more profitable they implement productive measures that cause workers diminution.
Internationalization creates an interest’s confrontation between the members of the society (government, enterprise, workers) that agree and those that do not. Sometimes, the governments in these countries focus on their economic goals and forget about the social consequences that this process involves.
The dissatisfaction of some members of society with the government measure, can slow down economic growth of the country. This is the case of many countries in Latin America. For example in Argentina, where an inadequate open economy process, that the state implemented, caused the Argentineans displeasure. It kept growing as they saw that the situation was getting worse and they were not able to see any benefit from it. By the end of the past year, all these feelings led them to the political instability that they are facing now. (El Pais, [web site])
- Cultural Problems
The process of open economy involves elements that may change in some way the custom and behavior of a particular society. “The argument concerning cultural homogenization suggests that national cultures that were very different are becoming less so as a consequence of such developments as increased international travel and global media and communication systems”. (Segal-Horn, 2002, p.9)
For example, in China, even though they preserve their culture, young people are now more likely to accept and to imitate U.S. life styles and values. The reason for this change is the influences of the global media in this country. Chinese consumers have been exposed to free choice over recent decades. ‘Currently, an increase of opportunity has become available, and this is new to them. Under these circumstances they are emulating Western brand preferences, learning about products and American behavior principally from mass media.’ (Shimp, T.,2000, 276).
The economic growth through international trade in developing countries can create a confrontation between national culture and the cultures of the other countries that are coming to the nation. This can cause damage to a nation’s identity. In addition, this process means the absorption of a country’s behavior, and sometimes they are negative and can create social problems.
- Environmental Problems
There is an especial link between international trade and the environment. ‘Developing countries are often concerned that their market access will be hampered by environmental regulations and by voluntary standards such as eco-labelling’ (Jenkins, 2001, p.163).
In order to create an attractive market to international firms, developing countries offer foreign enterprise low environmental standards, which will contribute to environmental problems affecting the entire world. Accepting a product, that is produced, without taking into consideration, the environmental impact, is a problem that involves all nations without distention between developed or developing countries.
Sometimes the government is lenient in regards to a firms environmental responsibilities, and do not pay close attention to a companies actions.
This is the case in countries like Brazil and Mexico, where their environment has suffered, due partly to the governments negligence to control the high levels of contamination that firms cause.
Solutions
Economic growth through international trade it is an indispensable issue for developing countries in order improve their standard of living. However, the transition is not simple, and sometimes their costs are very high.
To reduce the implications of this process is difficult, it requires a work group of all the members of society. For the reason that all the possible problems are linked, so if something goes wrong everything would go down.
Bearing in mind that all the problems are linked, the solutions for them could not be developed separately. In order to present solutions for the situations that developing countries could face, economic theory plays a key role in the bases of it’s construction. Therefore, they are going to be taking in consideration.
In order to tackle this situation, there is no simple solution that a developing country can implement. They may consider many factors to achieve the performance desired with their goal in mind.
Economic growth appears to correlate with the growth of exports, according to this, governments in these countries should veal their expansion by promoting them and creating measures that make them more competitive in the international market. “Exports make possible for Developing countries to overcome the limitations of their domestic markets in exploiting economies of scales”. (Balassa, 1998, p.280)
According to Raymond Vernon theory (Product life theory) and the examples of the developing countries performance in the international market that where shown. These nations permit the increase of foreign firms in their market who take a huge portion of the national firms market, as a result, of their poor competitive skills to preserve their customers.
Moreover, national firms tend to participate in international markets at a moment where they are all ready saturated, for that reason it is difficult to profit from it. Under these circumstances, it is relevant to developing countries to be able to innovate (product and service) and to recognize new potential markets where they can profit.
In that order, developing nations should consider what they have, in order to determine what they should produce. The theory of comparative advantage states that “a country should produce and export those goods and service for which is relatively more productive than are other countries, and import those goods and service for which other countries are relatively more productive than it is”. (Mahoney, Trigg, Griffin & Putstay, 2001, p. 102)
Under this theory, a country should produce those goods and services that it is able to produce relatively well, and buy other goods and services from those countries that can produce them relatively well. According to these facts, the country may specialize in specific goods and services taking into account international standards of productivity and quality.
However, this is not the only issue that developing countries governments should take into account if they want to solve the economic (devaluation, current account deficit, foreign debt), social (unemployment, income equality), political and environmental problems that the economic growth process may cause.
In addition, they have to add value to the resources they have, creating a competitive advantage (Doryan, 1993, p.451), that help them in sustainable growth.
As previously stated, the export expansion would help economic growth, and if a country is able to create a competitive advantage that would help them to get an important position in the global market. Under these conditions, they can avoid problems such as devaluation, foreign debt, unemployment, income and equality, political instability and environmental problems.
According to Porter’s theory, governments must ensure the development of four elements in order to get the nations continued competitiveness, they are:
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Productivity: Governments should veal for the industry efficiency creating a macroeconomic and financial dynamism, adequate infrastructure and a competitive domestic market with the participation of international firms.
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Socio-political Stability: It is necessary to build an environment that allow freedom of expression, human rights and were exist a confidence toward the judiciary system and the government, and good living standards. (Doryan, 1993, p.453)
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Human resources: “The human factor may ultimately come to represent the new competitive edge for the global corporation, more than physical and other resources” (Kedia & Mukherji, 1999, p.235). Government should be conscious of the important of human resources, for that reason it is important to create accessible educational and training opportunities.
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Environmental Conditions: In order to obtain Environmental sustainability governments should control the adequate management of natural resources, establish rules and procedures to control waste and pollution, and create a social consciousness of the importance of environmental conservation at firms and citizens levels.
Furthermore, Porter states that in order to obtain economic growth through great international trade, the government should be able to promote the creation of international clusters. For example, this is what Mexico is doing by linking with the United States. This is a situation, where Mexico can obtain many benefits in the growth of import and export. In addition, this country can gain access to their technology and human resources and incorporate them into their own country in order to maintain its economic growth and development and internationally competitive strength. (mirar bibliografia mexico)
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Balassa, B. (1998), “The Lesson of East Asian Development: An Overview”, The University of Chicago, pp.273-289
Doryan, Eduardo. (1993), “ An Institutional Perspective of Competitiveness and Industrial Restructuring Policies in Developing Countries”, Journal of Economics Issues, Vol.28, No. 2. pp. 451-457.
El Pais (2001), Dossier Documental, <htt://www.elpais.es/temas/dossiers/argentina.html>
accessed 5 April 2002.
Jenkins, Rhys. (2001). “Reconciling Trade and the Environment: Lessons from Case Studies in Developing Countries / Trade, Environment and the WTO: The Post-Seattle Agenda”, The Journal of Development Studies, Vol.37, No. 5. pp.163-165
Kedia, B & Mukherji, A. (1999), “Global Managers: Developing A Mindset For Global Competitiveness, Journal of World Business, Vol. 34, No. 3. pp. 230-239
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Mahoney, D., Griffin, R, Pustay, M and Trigg, M. (2001), International Business, (2nd edn), Prentice Hall, Australia.
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Ocampo, Jose & Tovar, Camilo. (2000), “Structural Adjustment, Macroeconomic and Equity in Colombia”, CEPA, Working paper No. 14.
Ros, Jaime & Lusting, Nora. (2000), “Trade and Financial Liberalization with the Volatile Capital Inflows. Macroeconomic Consequences and Social Impact in Mexico During 90s”, CEPA, Working paper No. 18.
Segal-Horn, Susan, (2002). “Global Firms – Heroes or Villains? How and Why Companies Globalise”, Europen Business Journal, Vol. 14, No. 1. pp. 8-19
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