Part 1. “Economic Base of World Politics”
Topic 1. TWO BASIC FORMS OF ECONOMIC TIES AND SIX PREVAILING SOCIALECONOMIC MODELS
It is well known that there is a tight connection and functional interdependence between economic development and political choices and actions. The economic situation often dictates a certain political course and concrete government actions both in domestic context and internationally, i.e., in relations with other countries or in the framework of particular international organizations.
In their turn, political decisions may have strong impact on overall economic situation, on certain economic processes and on the social status of particular groups within the population, as well as on international economic relations and international position of the country in question.
We must always keep in mind that, to a great extent, the international POLICY of any nation is an expression of its ECONOMIC INTERESTS. To really understand the MOTIVATIONS behind certain POLITICAL ACTIONS we need to know these interests and to be able to recognize their base in the social and economic system (or social and economic MODEL) of this particular country.
* Basically, there are ONLY TWO main forms of economic ties (or two kinds of economic relationship) known to economic science which predestine the social and economic characteristics of a country. Those are:
DIRECT ties,
INDIRECT ties.
# The DIRECT TIES are VERTICAL, more often than not ADMINISTRATIVE and DISTRIBUTIONoriented relations between persons or economic entities (production units) based on COMMANDS, subordination and strict discipline.
The DIRECT TIES predominating in the economy we find either:
in primitive society of the young period in the history of mankind with its weak productive forces and meager consumption close to the subsistence level
or (in quite recent times, namely throughout big stretches of the 20th century) under the socalled "Practical Socialism" a society based on STATE ECONOMY with its strong and highly centralized ADMINISTRATIVE mechanism of strict – though usually not quite effective – government PLANNING and TOTALITARIAN RULE.
So, we can conclude that a TOO WIDE use of ADMINISTRATIVE (i.e., COMMANDbased) RELATIONS is associated with inefficiency, slavelabor conditions and crying poverty of the population ("The Society of Poverty and Submission")
# The INDIRECT TIES represent HORIZONTAL, voluntary (freewill), PARTNERSHIPoriented, CONTRACTbased MARKET RELATIONS providing mutual interest (mutual gains), COMPROMISE and mutual COMPENSATION of the expenses (tending to equivalency of exchange). Usually such relationship is being serviced by MONEY (one of the grounds why we call this relationship INDIRECT).
When the economy is based mostly on INDIRECT TIES, it means that MARKET RELATIONS play the leading role in the economic mechanism of this society (nation, country). Practically, with this kind of economic relationship predominating, we get either the FREE MARKET ECONOMY (examples: advanced industrial nations of Europe in the 19th century or the USA of the 1920s) or the SOCIAL MARKET ECONOMY of today (like Sweden, Germany or Holland as the most colorful modern examples). So, generally speaking, INDIRECT (MARKET) TIES breed “The Society of Welfare and Freedom.”
* We have to grasp the important fact that BOTH kinds of relationship are represented in ANY economic system. In MARKET ECONOMY, there is enough place for DIRECT TIES too (in the administrative direction of SMALL plants or firms or in the BUDGET system of the state where funds are allocated by decree or parliamentarian decision) but we always find them in their proper place and NOT as a universal principle.
Accordingly, INDIRECT TIES (relationship of MARKET type) can be found also in the most centralized and strictly PLANNED economies (for example, in the form of personal cash spending of the population for goods and services) but inevitably in underdeveloped, subordinated and distorted state, pushed somewhere to the outskirts of the economic system. Paradoxically enough, even the PRIVATE (PERSONAL) CONSUMPTION in the former Soviet Union was organized mostly as a kind of administrativelymanaged DISTRIBUTION SYSTEM, while the normal "buyingselling" relationship (based on normal INDIRECT TIES of market type) was rather an exception than the rule.
Generally, as practice of the current global crisis has shown, in BAD TIMES the role of government with its regulating tools tends to grow and the scope of DIRECT TIES tends to expand. In contrast, in GOOD TIMES those are exactly INDIRECT (MARKET) TIES that tend to grow in importance and scope.
Thus, INDIRECT and DIRECT ties are binary components of any economic system. It is the PREDOMINANCE of ONE of them that determines (predestines) the socialeconomic character of the society:
is it a MARKET ECONOMY and DEMOCRACY
or is it a CENTRALIZED STATE ECONOMY and TOTALITARIANISM.
Taking this into consideration, some authors have categorized the states of the world as:
CAPITALIST (with absolute predominance of MARKET relations in their economic mechanism and almost none or minimal STATE REGULATION, like in Europe and the United States about hundred years ago),
SOCIALIST (with absolute hegemony of DIRECT, i.e. ADMINISTRATIVE, ties and STATE ECONOMY, like the former Soviet Union or today's North Korea)
and MIXED (where elements of BOTH markettype economic relationship between PRIVATE economic entities and of STATE economic activity can be observed and are kept in a certain BALANCE, like in Sweden, in the Netherlands, in Austria, or in Japan).
* However, BOTH types of socialeconomic system (i.e., COMMAND and MARKET ECONOMY) are capable of achieving their own kind of SYNERGISM (especially high results in certain fields).
The socalled "Practical Socialism" with its STATE ownership and centralized PLANNING creates good conditions for the development of MILITARYINDUSTRIAL COMPLEX (the MIC heavy, waroriented industry plus military establishment), while the production of CONSUMER GOODS and SERVICES is neglected.
In contrast to this, MARKET ECONOMY tends to promote the development of the CONSUMERORIENTED industries and the SERVICE SECTOR.
This explains why the REFORMING PROCESS in modern Russia has been representing BOTH the emergence of a new STATE ORDER (i.e., of the PARLIAMENTARIAN DEMOCRACY) and transition to a new MODEL of economic development (from heavyindustrybased STATE ECONOMY to consumeroriented MARKET ECONOMY).
The REFORMING which, in this particular case, means profound change of SOCIAL and ECONOMIC MODEL, creates a fully NEW situation when an existing society of "socialist" kind (aforementioned "Practical Socialism") gives place to a TRANSITIONAL SOCIETY on its way to more common (normal) economic system based on MARKET ECONOMY and developed DEMOCRACY (see Diagram 1.1.1 at the end of the TextBook).
* Let us compare some characteristics of each SOCIAL and ECONOMIC MODEL theoretically possible and practically found in the modern world, including the transitional ones. We shall start with "Free Market Economy" MODEL which historically created the BASE for modern industrial and postindustrial societies (we shall better understand all these terms a little later).
MODEL 1 FREE MARKET ECONOMY (now only rarely found in socialeconomic practice, mostly as short periods in history of individual countries; the most striking historical example European and American "capitalism" of the 1819th centuries, or the United States in the 1920s – 1930s):
1. Individual PRIVATE PROPERTY as the base of independent economic actions of persons and firms
2. Sufficient FREEDOM of economic actions (private initiative) guaranteed by emerging system of bourgeois law and order
3. NO systematic ECONOMIC REGULATION by the STATE (government) yet, underdeveloped system of STATE FINANCES (state budget), NO social programs
4. Gradual development of DEMOCRATIC FORMS of social and political life, usually big role of AUTOCRATIC power (of kings, czars, chieftains, etc.)
5. Big differences in INCOME, strong social contradictions
6. Ideology of the NATIONSTATE and egoistic, often EXPANSIONIST foreign policy (including PROTECTIONIST measures in trading policy)
MODEL 2 SOCIAL MARKET ECONOMY (industrial and postIndustrial societies of today and, most probably, of tomorrow):
1. Expansion of collective (group) form of PRIVATE PROPERTY based on jointstock capital and CORPORATIZATION
2. Strong LEGISLATIVE BASE allowing enough private initiative and freedom of economic action
3. Highly developed system of ECONOMIC REGULATION by the STATE, strong STATE FINANCES (budget system), many sometimes largescale and rich – SOCIAL PROGRAMS
4. Developed PARLIAMENTARIAN DEMOCRACY with sometimes strong SOCIALREFORMIST tendencies
5. Diminishing differences in the INCOME LEVELS and slackening of social tension, large and growing MIDDLE CLASS, firm SOCIAL ORDER
6. Pragmatic, but constructive FOREIGN POLICY (tolerance, "liveandletlive" policies), TRADE LIBERALIZATION policies on the world arena, tendency to growing COOPERATION (economic INTEGRATION) on regional basis, on the corporate level growing role of OUTSOURCING, leading to "siamization" (or “twinning”) of economies)
MODEL 3 "PRACTICAL SOCIALISM" (state economy and totalitarian rule):
1. STATE PROPERTY in disguise of PUBLIC property, private property outlawed
2. Absolute predominance of ADMINISTRATIVE, commandbased relations, submission and strong, semimilitary discipline
3. STATE DISTRIBUTION of resources (financial, material and even human), CENTRALIZED PLANNING of production and consumption
4. TOTALITARIAN RULE, mere traces of democracy, NO or very little respect for HUMAN RIGHTS, strong POWER STRUCTURE (party state KGB trade unions)
5. Rich and influential "NOMENCLATURA" (ruling class), incomes of the working population on a subsistence level, SHORTAGE of everything intended for the people
6. Expansionist, oppressive and provocative FOREIGN POLICY, low reliability as political partner for democracies, many NONCONSTRUCTIVE political actions and policies
MODEL 4 "POSTSOCIALISM" (a special variety of TRANSITIONAL society in the state of SELFREFORMING):
1. PRIVATIZATION and CORPORATIZATION of the STATE PROPERTY, decline in the public sector, painful structural evolution
2. Sprouts of freedom for the PRIVATE INITIATIVE but lack of legislative GUARANTIES, lack of STABILITY and ORDER
3. Disorder in the DISTRIBUTION (planning) SYSTEM, and at the same time emerging MARKETS and corresponding economic INSTRUMENTS (commercial banks, insurance companies, advertising agencies, consulting firms, etc.)
4. Developing but still weak PARLIAMENTARIAN DEMOCRACY, emergence of MULTIPARTY system, tendency to presidential rule with AUTOCRATIC (authoritarian) flavor, weakened power structure, strong leftist and rightextremist movements, outbursts of nationalism and violence
5. Growing differences in INCOMES, polarization in society ("new rich" versus impoverished majority of population), LACK of political and social STABILITY, danger of mutinies (revolts), many political CRISES as a result of sharp social and interethnic contradictions
6. Generally, more positive and constructive FOREIGN POLICY but many hesitations, setbacks, lack of stability and reliability, very often PROTECTIONIST tendencies in TRADE policy
* So, these are FOUR theoretically defined models of social economic system, either based on predominance of ONE of the TWO major forms of economic ties (relationships), or being in a state of TRANSITION from one basic model to another.
However, there also exists another quite special group of nations (highly differentiated and strong in number) consisting of the socalled DEVELOPING COUNTRIES the former COLONIES which, as a rule, obtained their political independence after the World War II (mostly in the 1960s). Their economic mechanism is rather ECLECTIC and still in a state of formation.
These young nations represent still another kind of TRANSITIONAL SOCIETIES (in contrast with the FOURTH group which we call "PostSocialism"). Their TRANSITION is one from POVERTY and AGRICULTURAL ECONOMY toward a degree of WELLBEING and a more or less mature INDUSTRIAL SOCIETY. All of them are going through INDUSTRIALIZATION and are in search for national identity and social order.
Let us try to classify this group on the same principles as before.
MODEL 5 DEVELOPING COUNTRIES (often summedup under the title the "Third World"):
1. Weird combination of feudal and modern PRIVATE PROPERTY including different kinds of "landlordism", NATIONAL trading and industrial capital and direct FOREGN investment
2. Much of the FEUDAL traditions but sufficient FREEDOM OF INITIATIVE
3. Strong STATE SECTOR side by side with smallscale agricultural and artisan production, PLANTATION economy and FOREIGN industrial enterprises
4. Mostly AUTHORITARIAN RULE, sometimes of the "junta"type (military power), weak DEMOCRATIC INSTITUTIONS but with prospects of further development
5. Big differences in INCOME LEVELS, considerable social and interethnic tension ("tribalism", etc.), but "spirit of freedom" and a strong feeling of national cause prevailing
6. Striving for ECONOMIC INDEPENDENCE, mutual cooperation in international politics (on regional and multilateral basis), egoistic (but weak) trading policy
SUBMODEL 6 "NEW INDUSTRIAL COUNTRIES" (NIC, or NIE from "Newly Industrialized Economies"):
16. HALFWAY to the developed market economy (sometimes of NOT quite "social" variety, like Hong Kong or Mexico) but already many typical features of INDUSTRIAL SOCIETY combining elements of TRADITIONAL lifestyle with MODERN traits and relatively HIGH incomes.
EXAMPLES:
FREE MARKET ECONOMY in reality, rather an exception, usually observed in individual countries during relatively SHORT periods when their MARKET mechanisms are emerging (in contrast, at least two economies those of Singapore and Hong Kong represent something close to this model for a rather LONG time already); from advanced nations, CLOSEST to this model remained (at least until the GLOBAL CRISIS has begun) the United States of America with its cult of individual freedoms, strong feelings against "big government" and the spirit of "New Frontiers"
SOCIAL MARKET ECONOMY again we must mention the U.S. (as a case with minimal STATE REGULATION); all West European countries, like Sweden, Germany, Holland, France, Austria, etc.; Canada and Australia and, of course, Japan (as a case with maximal STATE REGULATION and very strong CONTROL over economic processes)
"PRACTICAL SOCIALISM" North Korea, Cuba, China (mainly in respect to INTERNAL industrial and agricultural regions and POLITICAL structure)
"POSTSOCIALISM" Russia, Ukraine, Belarus, Armenia (and other Commonwealth of Independent States CIS countries, i.e., former Soviet Republics); Lithuania, Latvia, Estonia (the so called "Baltic States"); Romania, Bulgaria, Poland, Czech Republic and Slovakia, Hungary, Albania, parts of former Yugoslavia; Mongolia, China (at least, in respect to COASTAL regions with regime of free economic zones), Vietnam (economically much more than politically)
DEVELOPING COUNTRIES majority of states in Asia, Africa (excluding only the Republic of South Africa RSA ) and Latin America
except:
NEW INDUSTRIAL COUNTRIES (NIC) South Korea, Taiwan, Hong Kong, Singapore (the socalled "first generation" of Asian NIC, or "Four Asian Tigers"); Mexico, Brazil, Argentina (in Latin America);
The "second generation" of NIC (or NIE Newly Industrialized Economies) includes: Indonesia, Malaysia, Thailand and the Philippines (in Asia the socalled "Four Asian Dragons"); Chile, Columbia, maybe also Peru (in Latin America).
* This short comparative review shows the real scale of importance of the BASIC ECONOMIC FACTORS in the formation and characteristics of socialpolitical systems of societies (nations, countries) and their international (foreign) policy.
Obviously, those are the SECOND model ("Social Market Economy"), the FOURTH model ("PostSocialism"), the FIFTH model ("Developing Countries"), and the SIXTH submodel ("New Industrial Countries"), which represent LEADING TRENDS in the development of NATIONSTATES (national economies with their regulative mechanisms and structural characteristics).
At the same time, the FIRST model (representing the socalled "hardhearted capitalism, in which workers are sacrificed at the altar of lower prices and higher profits") becomes LESS and LESS popular. And the same – only much stronger – can be said about the THIRD model ("Practical Socialism"), where economic mechanism based on DIRECT TIES cannot secure modern life style and consumption pattern for the population (this model is already rather extinct, and will probably completely die out in the next future).
Also, it becomes more and more clear that something should be done with an overregulated, nontransparent and bureaucratized variety of MARKET ECONOMY as it exists in some otherwise "normal", and even prosperous, countries around the world. For example, in East Asia, Japan, and South Korea represent striking cases of OVERREGULATED ECONOMY, while Indonesia for a long time has been serving as a classical case of the socalled "crony capitalism" (when economy is controlled by a narrow group which, in Indonesian case, was centered around now former president Suharto and his family).
If we take Japan, there a very special kind of "softhearted capitalism" obviously tends to prefer "economic security" (understood as the preservation of "status quo" including its NEGATIVE features, such as inefficient banks overburdened by BAD DEBTS or a visible SLUMP in consumer demand) rather than painful but healing CHANGES which could create conditions for “more jobs and growth".
A new term "THIRD WAY" has been invented recently to describe a kind of "OPTIMAL MARKET ECONOMY" where there is enough FREEDOM for private BUSINESS to secure high economic dynamics while ECONOMIC ROLE of the STATE organs is rather restricted, but civilized and clever. Please, compare this modern concept with the "MIXED ECONOMY" model. Pay attention to the fact that the "THIRD WAY" policies have been first proclaimed in Europe (particularly, in Great Britain).
* It is not surprising that in the last decade of the 20th century the TEN MOST DYNAMIC nations in the world came from the SIXTH group (Asia's NIE Singapore, Hong Kong, Taiwan, Malaysia) and the SECOND group (social market economies of New Zealand, the U.S., Luxembourg, Switzerland, Norway and Canada, thus representing all THREE major regions of the industrial world). Of course, behind their remarkable success are very different combinations of factors and policies which should be regarded individually.
As “the rule of thumb,” we can stress that the BEST RESULTS are usually achieved by countries with enough ECONOMIC FREEDOM and with effective, but NOT overdeveloped, ECONOMIC REGULATION by the STATE.
Since the begin of the 21st century, China, India, Brazil, as well as other BRICS countries (Russia, South Africa) have been demonstrating an enviable growth potential. It is difficult to judge, however, to what degree their not petty achievements are resulting from FACTORS which can be summed up under the concept of ECONOMIC FREEDOM.
As Thomas Paine, English born American author, whose writings were important influences on the American Revolution, once wisely noticed, "That government is best which governs least."
The dynamic nature of Asian nations, since the 1990s, could be seen especially clearly in the field of INTERNATIONAL TRADE. With their rapidly growing IMPORTS which illustrate the region's tremendous PURCHASING POTENTIAL, developing Asian countries have become the FOURTH FOCUS of global commercial activity. In 1999, the MERCHANDISE IMPORTS of the main Asian traders (including "four tigers", "four dragons", China and India, but WITHOUT Japan) amounted to $889 billion, while comparable imports of the U.S. were $1.059 billion (the whole NAFTA area – $1.280 billion), of the European Union $2.232 billion (of which import from countries outside the EU – about $890 billion), and of Japan $311 billion. Recent estimates indicate that HALF of the world's 10 largest economies by the year 2020 will come from East Asia.
* You might know that, since midsummer 1997, some Asian countries (most of all, Thailand, Indonesia, Malaysia, South Korea) have been facing serious financial and economic difficulties (the socalled "financial meltdown" and "economic slowdown"). By the middle of 1998, these local troubles have overgrown into a REGIONAL CRISIS (i.e., the famous Asian crisis) and even threatened to provoke, in the worst case, a GLOBAL MARKET SLUMP. Fortunately, this threat did not materialize, and since the second half of 1999 Asian crisis generally dissolved and economic growth resumed.
* At least partly as a result of those sad events in other Asian countries, also ECONOMY OF JAPAN got in real danger (first time in more than two decades, actually). After about SEVEN years (19901997) of nearly STAGNATION ("nearzero economic growth"), in 1998 1999 Japan's main MACROINDICATORS like Gross National Product GNP, or new investment – have shown a DOWNWARD trend. The head of Sony Corp. warned that Japanese economy might be “on the verge of collapse". Since 2000, however, also in Japan the economic growth resumed, albeit at low rates and with danger of new relapses into stagnation and slump.
Thus, the need of REFORMING remains very TOPICAL. "The political inertia and inability of world's secondlargest economy to restore growth looms as the major obstacle to economic recovery in Asia," wrote Los Angeles Times on the very eve of the New Millennium celebrations.
The issue of the "Big Bang" a nickname for a deep and energetic reform of Japan's financial and economic system in the direction of radical DEREGULATION and more OPENNESS of domestic markets to foreign businesses – looms high on the political agenda. You should know that this ambitious program of financial reforming has been initiated by the then Prime Minister Ryataro Hashimoto as early as November 1996 and is often associated with his name. It envisaged several stages and was expected (as it turned out, wrongly) to be concluded by the end of the year 2001. It is worthwhile to notice that many elements of Japan’s Big Bang, including its nickname, are based on a similar program implemented in Britain since mid1980s.
Also, at the begin of 1999, Japan’s government adopted a basic plan for reforming country’s CENTRAL BUREAUCRACY as to fit new conditions in the 21st century. Since January 2001, the number of ministries and central government agencies was reduced from 21 to 12, and the number of bureaus and secretariats – from 128 to 96. Correspondingly, the number of national government employees was to be cut by about 25 percent during 10 years.
* On the other hand, at least since the Asian crisis, there has been a lot of sharp criticism directed at the modern – often dubbed “AngloSaxon” version of FREEMARKET ideology. This new brand of ECONOMIC POLICY often called “NEOLIBERALISM” and characterized by a radically LIBERAL, or “laissezfaire”, approach to economic matters has been rudely imposed on many troubled developing countries by the International Monetary Fund (IMF) in exchange for financial “rescue packages” aimed at stabilizing their financial situation. Politicians, economic analysts, even late Pope John Paul II blamed NEOLIBERALISM for social and economic PLIGHT befallen many countries in Latin America (first of all, Mexico), in South East Asia and Africa at the end of the 20th century.
* The current GLOBAL FINANCIAL AND ECONOMIC CRISIS has brought many changes in the economic mechanisms of individual countries. As a general trend, a new turn TOWARD Keynesian recipes and AWAY from monetarist methods of state regulation can be named. The financial troubles have also put on the international agenda the necessity of further developing and improving REGIONAL and GLOBAL (multilateral) economic INSTRUMENTS and INSTITUTIONS. We shall discuss related questions in some of the following Topics of the course.
* As of late, the ECONOMIC MECHANISM of Japan, together with its MODEL of economic MANAGEMENT, has been provoking more and more theoretical and political DISPUTES. Traditionally, Japanese corporations are responsible to their STAKEHOLDERS, which include not only their owners (SHAREHOLDERS) but, most importantly, their EMPLOYEES, CUSTOMERS, SUPPLIERS, CREDITORS and the COMMUNITIES where they do their business. This system, ruling economic life first of all on the MICROLEVEL, is mainly oriented on keeping STATUS QUO, which more often than not may undermine economic DYNAMISM. However, it undoubtedly has also its strong points which have been becoming obvious under the conditions of global crisis. In contrast, the Western (predominantly, AngloSaxon) model is based on the relationship between shareholders, management and the board of directors, and emphasizes the socalled “SHAREHOLDER VALUE” as the main criterion of business success. Its advocates (who are usually also the toughest critics of Japanese management) favor the principles of modern “CORPORATE GOVERNANCE” as it is seen in the United States, in the United Kingdom, in many other places in Europe and worldwide, for example and especially, in Hong Kong and Singapore. No one knows the truth, however, at least for the time being.
Topic 2. INDUSTRIALIZATION AND EMERGENCE OF MODERN MARKET ECONOMY
To be able to clearly see the motives behind certain political actions and modes of practical political behavior of countries with different socialpolitical systems we need to have profound understanding of the ORIGIN (genesis) and the MECHANISM of their economies.
As a matter of fact, the socialeconomic PRINCIPLES on which particular countries with their economic systems and foreign policy are based can vary dramatically. And major role in this differentiation plays their belonging or NOT belonging to the family of MARKET ECONOMIES and the degree to which they have developed their market relation and mastered the POTENTIAL of the SOCIAL DIVISION OF LABOR to achieve reasonable (and therefore profitable) SPECIALIZATION of national production, its high EFFICIENCY and sufficient COMPETITIVENESS of goods produced for domestic and foreign markets.
However, to develop a normal MARKET SYSTEM with enough space and freedom for creative forces of COMPETITION, the society must possess (or consciously create) some necessary PRECONDITIONS (or PREREQUISITES) for emergence and maturing of the exchange (market) relations.
* PREREQUISITES. Here are the THREE PILLARS on which any MARKET ECONOMY (or COMMODITY ECONOMY, where commodities, or GOODS, are manufactured NOT for the producer's own needs, but with special aim of selling them on the market) is based:
# economic ISOLATION (AUTONOMY, or independent legal status) of producers of goods and services, who are also their owners, and of other economic subjects (traders, carriers, moneylenders, etc.)
# sufficient FREEDOM of action for EACH of such economic subjects in HIS or HER (or ITS, if we speak of a firm) striving to secure own interests
# DIVISION OF LABOR between them, i.e., a system, where every economic subject "works (produces) FOR the market" and "lives FROM the market" (that means purchases everything necessary for his life and business ON the market).
Historical experience has shown that the FIRST CONDITION is easier and fuller secured on the basis of PRIVATE OWNERSHIP (or PRIVATE PROPERTY) relations. It is important to notice that the institute of PRIVATE PROPERTY is not so easy to create. For example, in Western Europe it has taken CENTURIES (approximately from the 15th century to the second half of the 20th century) to establish complete system of private ownership based on a wide set of legislative acts to guarantee and to defend it.
The SECOND CONDITION comes out as certain ECONOMIC LIBERTIES, i.e., freedom of COMPETITIVE BEHAVIOUR, freedom of ECONOMIC MANAGEMENT aimed exactly at protecting the interests of a concrete producer or trader, so that he could expect a reasonable PROFIT (of course, if he is good at his job).
The THIRD CONDITION, in its turn, is connected with the development grade of economic SPECIALIZATION and COOPERATION in the sphere of PRODUCTION, i.e., with the widening and deepening of the SOCIAL DIVISION OF LABOR.
It is the existence of these PREREQUISITES in a society that makes the INDIRECT (MARKET) form of economic TIES the main, predominant one. MARKET with its COMPETITION provides a firm basis for a COMMODITY PRODUCTION (also called "PRODUCTION OF GOODS") and becomes the principal element of the ECONOMIC MECHANISM of the society.
On the market, i.e., in the sphere of INDIRECT, partnershipbased, compensatory ties, there is much SPONTANEITY, the factor of UNCERTAINTY is strongly felt, a clash of INTERESTS of individual economic subjects takes place. The autonomous economic activity and sovereign, "egoistic" behavior of participants in MARKET COMPETITION have as their side effect the satisfaction of SOCIAL REQUIREMENTS (very often without any comprehension of this on the side of economic actors).
There is also strong DIFFERENTIATION among the producers themselves: for the most successful and progressive ones market temporary secures their advantages due to INNOVATION (a kind of "technological monopoly"), while the weakest, backward ones are mercilessly ruined by it. Thus, SELECTION of the best producers takes place, hand in hand with general STIMULATION of scientific and technical (technological) achievements which once again serve to meet social interests.
* MECHANISM. As a system, MARKET represents a certain balance of the TWO principles:
COMPETITIVE principle (independent, spontaneous, egoistic actions),
REGULATIVE principle (elements of regulation, organization, control, coordination; manifestations of monopolistic collusion; a kind of established "rules of the game") see Diagram 1.2.1 at the end of the TextBook.
On the one hand, a multitude (big number) of independent COMMODITY PRODUCERS with different production conditions, individual characteristics of their products, different resource base etc. take part in COMPETITION. Their COMPETITIVE BEHAVIOR is characterized by sovereign, isolated, often uncoordinated, but largely spontaneous actions aimed at guaranteeing their own interests. Therein lies the COMPETITIVE PRINCIPLE inherent in the market system.
On the other hand, however, on EACH market and for EACH concrete type of product the SUPPLY and DEMAND are represented NOT by an infinite, but by quite definite and NOT necessarily large number of economic subjects (individual persons, industrial and trading firms). Very often, within a limited number of SELLERS (and/or BUYERS) of some or other product, there may arise an open or secret DEAL (exactly this is called "COLLUSION") on individual questions of market policy, mostly on PRICES (those are typical features of MONOPOLIST behavior). There always is a certain COORDINATION of actions on the market. It does NOT preclude COMPETITION among SELLERS and BUYERS, but imparts to it some ORDER, some UNIFORMITY of behavior.
Let us add to this that each commodity market is characterized by a certain UNIFORMITY (community) of DEMANDS made by purchasers (consumers) on a given product. Each market is also characterized by generally similar effect of SEASONAL and FASHION factors, by common QUALITY CRITERIA regarding goods circulating on it, as well as by existing trading methods, typical terms of payment, etc.
So, each market has its own measure of REGULATING and COMPETITIVE behavior of both sellers and buyers, i.e., its own "RULES OF THE GAME".
Like in a good soccer match, in a well developed market stability of "game" quality well agrees with the dynamism and mutability of situations, strictness of the "RULES OF THE GAME" with improvisations of "players" and unpredictability of the outcome of the confrontation, certain harmony and aesthetics with passion and drama.
The combination and dialectic interaction of COMPETITIVE (spontaneous) and REGULATIVE (organizing) principles inherent in the MARKET produce an EFFECTIVE MECHANISM to guarantee INDIVIDUAL (private), GROUP (collective) and PUBLIC (nationwide) interests.
Thus, the MARKET MECHANISM can be characterized as a system of "ORGANIZED COMPETITION"(or of “REGULATED COMPETITION”). In fact, this system (the economic mechanism of a society) has a large SELFADJUSTMENT POTENTIAL (we can also name it AUTOMATICTUNING QUALITY) and an inherent tendency toward an OPTIMAL combination of the competitive and regulative principles. This OPTIMUM (typical for NORMAL market conditions) can be defined as “MAXIMUM of competition with MINIMUM of regulation (organization, control, coordination)”.
DEPARTURES from this OPTIMUM bear the DANGER of great losses for the society. For instance, unrestrained COMPETITION coupled with weakening of regulative mechanism ("rules of the game") may entail DESTRUCTIVE consequences: bankruptcies, unemployment, fraudulence (cheating) and product falsification.
On the contrary, EXCESSIVE ORGANIZATION and hypertrophied regulative tendencies threaten to bring about STAGNATION and DECAY, as well as loss of impetus for innovations and shameless robbery of consumers by way of very HIGH ("exclusive") PRICES (a kind of MONOPOLY situation).
In today's economic structure with strong positions of BIG PRODUCERS the possibilities for SELFADJUSTMENT of the market mechanism are rather WEAK. So, "ORGANIZED COMPETITION" in its OPTIMAL form (as "MAXIMUM of competition with MINIMUM of regulation") can only be assured by the conscious and refined use of SPECIAL economic policies of the STATE aimed at restoring and maintaining this optimum. Although such policies also represent a kind of STATE REGULATION, their SPECIAL GOAL is to strengthen the MARKET FORCES, to give impetus to COMPETITION and to stimulate SMALL and MEDIUMSIZE businesses (here we can mention such things as ANTITRUST activities and FINANCIAL SUPPORT of independent producers).
Actually, what we call here "ORGANIZED COMPETITION" is, in reality, FREE COMPETITION of our day. It assures necessary correspondence (or accordance) between the PRODUCTION STRUCTURE (supply) and the SOCIAL NEEDS AND WANTS (demand). It also stimulates the application of new machinery and new technologies (innovations), encourages the BEST producers, "punishes" the WORST and lies in wait for the SLOWEST.
* HISTORICAL GENESIS. Maybe it sounds unexpected, but actually the by far longest part of its history the mankind has been living WITHOUT MARKET, under the conditions of the socalled NATURAL ECONOMY. It was the world of DIRECT ECONOMIC TIES, of COLLECTIVE WORK under the COMMAND of tribal chiefs or heads of families, with low productivity and EGALITARIAN DISTRIBUTION of food and all other material resources, in closed selfsufficient communities (the socalled "AUTARCHY"). There were almost NO contacts with the outside world and practically NO opportunities for regular EXCHANGE of goods or services (i.e., no INDIRECT ECONOMIC TIES that serve the MARKET RELATIONS).
If we imagine that the 1, 5 million years old mankind is now at the end of a 1000meter running distance, it turns out that MORE than 998 meters of this historical path it has run in the absence of MARKET RELATIONS. And from the remaining less than TWO meters, only the last 3040 cm (about 600 years) were covered under conditions of visibly prevailing MARKET ECONOMY (i.e., with production of goods mostly for sale and a rapidly developing system of social division of labor), while the INDUSTRIAL SOCIETY with developed MODERN MARKETS takes merely about FOUR last centimeters of this imaginable distance.
However, in the period of the socalled "feudalism", i.e., in Middle Ages and in the epoch of the Renaissance, MARKET already appeared as a relatively OMNIPRESENT (universal, widely spread), although not fully developed, BASIC ELEMENT of economic and social life, gradually preparing conditions for the coming INDUSTRIAL REVOLUTION, bourgeois upheavals and the spread of hired labor system (what is usually summed up as "capitalism").
In Western Europe of that time, typical was a rapid growth of cities (townships). Those were "microsocieties" where the socalled "MONOSTRUCTURES" prevailed. It means that these cities lived their own life under the strong rule of local masters (lords or princes) and in each of them there usually was a pretty SMALL NUMBER of producers (sellers) and consumers (buyers), while the varieties of products circulating on the local markets as goods (commodities) were not numerous either.
Thereby the SUPPLY on these local markets was originally RESTRICTED, nor could it greatly exceed the limits of the DEMAND depending on the size and incomes of the townsfolk (local population).
We can add to this that the RULERS (lords and princes) exercised a strong CONTROL over the production, first of all over the NUMBER of producers (through the socalled "gilds"), issuing special PERMITS (licenses) to open new workshops. So, the SUPPLY on the local markets was restricted thus artificially establishing a kind of FEUDAL MONOPOLY. The "REGULATIVE" forces on the markets PREVAILED over the forces of COMPETITION.
However, the "MONOSTRUCTURES" could NOT have lived long. The guild (workshop) system was based on the principals of MANUFACTURY (i.e., on a profound and sophisticated system of TECHNOLOGICAL division of MANUAL LABOR and its cooperation). It brought about such a considerable GROWTH IN PRODUCTIVITY that the town boundaries began to tumble down (to collapse) and the local products (goods, commodities) started to circulate in the neighboring country and in other towns, sometimes rather far away. The "microsocieties" opened their doors forming wider MARKET STRUCTURES which embraced several towns, whole regions and even countries (the emerging NATIONSTATES).
Accordingly, the former "MONOSTRUCTURES" were replaced by new "MULTI STRUCTURES", i.e., by a LARGE NUMBER of independent (mostly small) producers, a relatively mass demand and rapid growth of the number of types of products ("commodity nomenclature") sold on the emerging national markets. Especially prospered inventive producers who introduced NEW PRODUCTS and so enjoyed a kind of monopolistic position on the markets ("monopoly of distinction").
In the market mechanism itself, with feudal power being clearly on the decline, there was a sharp turn towards the COMPETITIVE forces. There arose what in theory is called ATOMISTIC STRUCTURE of the market characterized by DESTRUCTIVE COMPETITION, a MULTITUDE of small producers, market instability and strong POLARIZATION (differentiation) of producers (successful and unlucky, getting rich and close to ruin).
The accelerated development of SCIENCE AND TECHNOLOGY laid foundation for the future INDUSTRIAL REVOLUTION. Thus, NEW lines of production sprang up all over, tens and hundreds of NEW types of products were annually developed and tried on the market, NEW technologies, technical implements and organizational principles were tested in MANUFACTURE PRODUCTION growing over into MACHINE PRODUCTION (factories and plants instead of old gilds and workshops).
* Over TWO centuries (in case of Britain the "pioneer" of the Industrial Revolution a whole century BEFORE other European nations) at least SEVEN radical processes simultaneously developed in the economic sphere building up the cumulative process of INDUSTRIAL REVOLUTION:
* spread of MACHINE TECHNOLOGIES (instead of MANUAL WORK technologies)
* creation of LEGISLATIVE BASE (system of law and order) stimulating growth of industrial MARKET ECONOMY by the new bourgeois governments
* transition to the use of HIRED LABOUR on a mass scale
* emergence of COLLECTIVE (group) forms of PRIVATE PROPERTY (jointstock property, corporatization)
* rapid ACCUMULATION of capital (massive INVESTMENT in production)
* creation of a mighty RAW MATERIAL BASE for European industrial centers in the COLONIAL PERIPHERY
* establishment of an INDUSTRIAL PRODUCTION STRUCTURE (in its first "rough" variant typical for countries on early stages of INDUSTRIALIZATION)
ALL these processes TOGETHER meant exactly INDUSTRIALIZATION and represented the FIRST PHASE in the formation of modern INDUSTRIAL SOCIETIES. In contrast to this, Carl Marx regarded these processes as EMERGENCE OF "CAPITALISM" and built up his "revolutionary ideology" around this concept.
* In the course of industrialization, the development and application of MACHINES went very UNEVEN (with different speed). It concerns both SECTORS (individual industries) and COUNTRIES, on the one side, and production and market positions of individual FIRMS, on the other side. Leading INDUSTRIAL and TRADING COMPANIES began to appear. The CONCENTRATION of production and capital was supplemented with the CENTRALIZATION of capital, particularly along the lines of HORIZONTAL INTEGRATION through intrasectoral MERGERS and TAKEOVERS (now more often called "mergers and acquisitions" M&A) of formerly independent firms. Here, a powerful impetus was given by the spread of the JOINTSTOCK form of property and organizational structures of a CONCERN type. Jointstock FINANCING began to play an important role in capital formation.
As a result, by the end of the 19th century in the European countries (in Britain a hundred years earlier), in North America and Japan INDUSTRIAL STRUCTURE of production came into being and gained in strength pushing the NONMECHANIZED manual labor to the PERIPHERY of the economic system. In each of the industries (sectors) thus formed, a SMALL GROUP of producers took the leading, even dominating role enjoying what economic theory calls MONOPOLIST POSITION (monopoly).
What one could observe in the beginning of the 20th century was, however, NOT "the last stage in the development of capitalism" (as Vladimir Lenin regarded it). It was a painful, internally contradictory, but still inevitable as the early fruit of the industrialization, FIRST STAGE in the development of a NEW technological mode of production, i.e., of the MACHINE PRODUCTION the base of the economic system of modern INDUSTRIAL and POSTINDUSTRIAL societies.
The ATOMISTIC STRUCTURE preceding the industrialization and based on the MANUAL WORK was being replaced by a new kind of economic structure, which we call "RIGID" MONOPOLY, characterized by HEGEMONY (absolute power) of a couple (one two three five) of MAJOR COMPANIES in each of the basic industries. So, for a certain period of time the REGULATIVE PRINCIPLE (in its extreme, MONOPOLIST form) prevailed once more, while the forces of COMPETITION were put down (restricted) and could NOT fully exercise their fruitful influence on the economy.
In the last sixseven decades, however, under the influence of further technological development, this "RIGID" MONOPOLY STRUCTURE has been losing its "rigidity" and transforming to even newer kind of production and market structure to that called OLIGOPOLY. It is the stage of the MATURE industrial system characterized by COEXISTENCE in every industrial sector of BIG, MEDIUMSIZE and SMALL firms (producers and traders) living in a kind of "symbiosis", i.e., in a very complex relationship combining elements of COMPETITION and COOPERATION between them ("liveandletlive" principle). By the way, the NATIONSTATES contributed much to the emergence of the OLIGOPOLY SYSTEM by their ANTITRUST LAWS and policy of SUPPORTING small business.
In a book describing emergence and growth of modern tobacco industry in the U.S. ("Ashes to Ashes" by Richard Kluger) this historical process of change is illustrated on example of one particular industry based on advanced MACHINE technology. In about 30 years, the at first splintered TOBACCO industry made a transition from HANDREDS of small, familyowned concerns to an ABSOLUTE MONOPOLY of ONE man, James Buchanan Duke, and then to market OLIGOPOLY conditions which brought about a big variety of new tobacco products thus enhancing the consumers' choice.
It is worthwhile to notice that in modern times the "RIGID" MONOPOLY conditions can be found only SELDOM, i.e., in rather RARE cases, as a kind of EXCEPTION, for a SHORT PERIODS of time and in very special cases (for example, in very NEW and TECHNOLOGICALLY UNIQUE industrial sectors enjoying GOVERNMENT ASSISTANCE, like AEROSPACE industry, where right now the world market of commercial airplanes is dominated by only TWO major producers American Boeing, which since 1997 also includes McDonnell, and Europe's Airbus Industrie consortium). Usually, however, in a couple of years the situation changes, and the extraordinary MONOPOLY conditions evolve to become similar to that of the more "regular" OLIGOPOLY.
In this historical transition to OLIGOPOLY, the COMPETITIVE FORCES of the market at last found an OPTIMAL BALANCE with the REGULATIVE FORCES, and that allowed to fully realize the POTENTIAL inherent in the MECHANISM of "ORGANIZED COMPETITION" typical for societies based on MARKET ECONOMY, i.e., on the principle "MAXIMUM of competition with MINIMUM of regulation".
* In Diagram 1.2.2, you can see a drawing which shows a typical way of emerging and maturing of an INDUSTRY (industrial sector) and its MARKET. The curve clearly indicates the "rollback" from "RIGID" MONOPOLY regime and transition to OLIGOPOLISTIC STRUCTURES, i.e., to the mentioned "symbiosis" of BIG, MEDIUMSIZE and SMALL business.
In EACH industry, on EACH sectoral market a situation arises sooner or later when the bulk of finished products comes from a RELATIVELY NARROW CIRCLE of big producers capable of strongly influencing the market situation (first of all the PRICES), thereby effecting "GROUP MONOPOLY" (i.e., OLIGOPOLY). However, their own production is efficient precisely because it is based on the principles of profound DIVISION and wide COOPERATION of resources and labor including SUBCONTRACTING RELATIONS with independent partners from among small and midsize firms.
Moreover, a certain portion of any sectoral production comes from relatively SMALL outsider FIRMS offering NEW products or using NEW technologies and being therefore capable to work at a profit. By the way, such firms have it relatively EASY exactly because of the CONDITIONS on the sectoral market created by the oligopoly supply which helps to keep PRICES at sufficiently HIGH level.
The last decades have shown that "narrowed", but still quite EXTENSIVE (in comparison with the "rigid" monopoly conditions) OLIGOPOLY STRUCTURES of sectoral markets provide sufficient latitude (enough space) for COMPETITION, thereby encouraging technological and organizational INNOVATIONS and that even more among SMALL and MEDIUMsize firms than among the BIGGEST.
Here lies the fundamental distinction of the OLIGOPOLY and its decisive ADVANTAGE over "RIGID" MONOPOLY, when the market has been really strongly undermined, and stagnation and ruin in the vortex of contradictions have threatened the emerging industrial society.
The TRANSITION from "ROUGH" industrial structures with their "RIGID" sectoral monopolies to more flexible and "spacious" (extensive) OLIGOPOLY STRUCTURES with enough COMPETITION and big opportunities for technological cooperation among firms of different sizes started in the United States in the 1920s1930s, while in Europe, in Australia and New Zealand it has displayed itself considerably later, only over the second half of the 20th century.
However, today OLIGOPOLY production and market STRUCTURES have became typical for national economies of practically ALL industrial countries, encouraging competition, rapid technological progress and structural change, high efficiency of production, social and political stability, and international cooperation.
In Japan, the emergence of modern OLIGOPOLY relations developed over a long historical period dating back to the middle of the 17th century when the two first zaibatsu Mitsui and Sumitomo came into being. Since then, the zaibatsu type of organization links, nowadays regarded as a kind of intermarket group, such as giant industrial CONGLOMERATES Mitsubishi and Mitsui, has more and more taken the character of an OLIGOPOLY arrangement. The same is valid also for keiretsu, or a specific kind of intramarket group usually formed around a SINGLE large company operating in a SINGLE market (such as Toyota in automobiles or Matsushita in electronics) which includes many subsidiaries and affiliates (about both zaibatsu and keiretsu we shall further speak in Topic 4).
* However, aside of the BASIC MECHANISM of MARKET ECONOMY (characterized earlier as effective system of "ORGANIZED COMPETITION"), we can also distinguish its FUNCTIONAL STRUCTURE, i.e., PRINCIPAL BUILD of a modern INDUSTRIAL and POSTINDUSTRIAL economy (see Diagram 1.2.3).
* FUNCTIONAL STRUCTURE. To better understand specific character of this structure let us compare it with a sweet delicious cake like one you may order in a coffee shop. As you well know, a cake often consists of THREE different layers. While EACH of these LAYERS has its special purpose and unique characteristics, ONLY ALL THREE TOGETHER represent the WHOLE (i.e., a tasty CAKE or, for that matter, an effective FUNCTIONAL STRUCTURE of the MARKET ECONOMY).
# At the bottom of the structure lies the socalled MICROLEVEL formed by independent business activities in production, science, finance, trade and services undertaken by INDEPENDENT PRODUCERS (either by individual OWNERS, small and mediumsize FIRMS, or by big CORPORATIONS, also called "CONCERNS" a term which you will better understand after Topic 4).
Here, at the MICROLEVEL, commodity producers work DIRECTLY for the market, manufacturing final (finished) or intermediate (semifabricated) PRODUCTS and rendering different kind of SERVICES. While doing so, they strictly CALCULATE their expenses and future earnings in their striving for PROFIT. These private firms use such implements as modern ACCOUNTING, refined MARKETING and LOGISTICS techniques to achieve HIGH EFFICIENCY of their production and sufficient COMPETITIVENESS of goods manufactured by them. Their products (services) may be meant either for ordinary COMMERCIAL sale (through their own stores and/or with the help of specialized trading companies) or on a SUBCONTRACTING basis i.e., for a particular purchaser, mostly on the basis of longterm PRODUCTION COOPERATION relations (all this is also called SUBCONTRACTING system).
# In the latter case, actual INDEPENDENCE of producers is somewhat LIMITED, as they find themselves in a rather STRICT, technologically predetermined SYSTEM which dictates the rhythm and qualitative characteristics of shipments (deliveries). As a rule, PRICES figuring in such COOPERATION transactions are somehow LOWER than those in COMMERCIAL TRADE (i.e., on an "open" market). This is a kind of "payment" for the opportunity to work for a GUARANTIED MARKET (i.e., a certain "price" for steady partnership relations) which assures SALES on a longterm basis.
Precisely such stable and reliable COOPERATIVE TIES form the MESOLEVEL (middle, intermediate level) of the FUNCTIONAL STRUCTURE of a highlyindustrialized MARKET ECONOMY (like, in our metaphor, a cream filling forms the medium layer of a cake).
Very often cooperationbased relationship rests on TECHNOLOGICAL division of labor WITHIN the production complex of a company. In such cases, we usually find MANY typical elements of ADMINISTRATIVE COORDINATION, i.e. of DIRECT ties, especially in SMALL and MEDIUMSIZE firms.
As for BIG modern concerns, WITHIN their DECENTRALIZED organizational structures the role of INDIRECT ties (i.e., of MARKETtype relationship) often is a major one. There, more and more typical become highly COMMERCIALIZED relations between company divisions which supply each other with their products and services NOT on order (command) but on the basis of financial compensation using the socalled TRANSFER PRICES. In cases when production cooperation is being organized through inviting INDEPENDENT partners on a CONTRACTING basis, we also deal with a major role of INDIRECT ties, i.e., with relations of a purely MARKET type, even if the DISCIPLINE of deliveries in such partnership can be very strict (the socalled "justintime" JIT system is often regarded as the highest form of such relationship).
In BOTH last cases the COMPETITIVE forces remain at active play, NOT allowing the SUBCONTRACTORS (DIVISIONS of the same company or INDEPENDENT SUPPLIERS working on a SUBCONTRACTING basis) to feel safe. Competition, MARKET motivation stay in force. Precisely that assures very high EFFICIENCY of modern COOPERATION systems and technological PROGRESS for society as a whole.
# Finally, the MACROLEVEL of the market structure is formed by the regulative activity of the STATE, its economic policy (including international, mostly trading aspects of such policy). We speak here of a WHOLE TOOLKIT of means and policies at the disposal of the state (government) allowing it to exercise INFLUENCE on the market situation and the conditions of economic life as a whole.
Let us make special stress on the fact that a typical FUNCTIONAL STRUCTURE of the modern MARKET ECONOMY necessarily includes many and various elements of STATE REGULATION. For example, very important among such elements are those directed at securing the REGULAR COURSE of economic processes, preventing RECESSIONS (slumps) in production and dangerously high rate of UNEMPLOYMENT. Others are aimed at a certain REDISTRIBUTION of income and wealth (mostly through TAXATION policies) as to assist small producers and to support elderly people, disabled, etc. (we shall speak of different MODELS of ECONOMIC REGULATION exercised by the STATE in the next Topic).
It is also worthwhile to notice that nowadays effective FUNCTIONAL STRUCTURES, including as necessary element different tools of STATE REGULATION, are emerging NOT only on local and NATIONAL MARKETS (i.e., WITHIN individual countries), but also on the scale of large REGIONAL MARKETS (like Europe or North America). This new trend has got a new strong impetus from the repercussions of the modern GLOBAL FINANCIAL AND ECONOMIC CRISIS a phenomenon we are observing right now.
Topic 3. ECONOMIC AND POLITICAL FEATURES OF INDUSTRIAL AND
POSTINDUSTRIAL SOCIETIES
You already know that in the second half of the 20th century the production and market structures of OLIGOPOLY have become typical for the national economies of practically ALL industrial countries. Here it is worthwhile to notice that the cumulative process of INTERNATIONALIZATION of economic life, which shall be analyzed later, has given rise to a tendency to RECREATE such structures also within a WIDER international framework – on world commodity MARKETS, in particular economic REGIONS (like Europe or North America), and on a GLOBAL scale.
In the area of DEVELOPED industrial societies, i.e., in Western Europe, North America, in the Pacific basin (Japan, Australia, New Zealand), the INDUSTRIAL MARKET SYSTEM has taken final shape and reached its maturity in the second half of the 20th century or, in historical terms, literally before our eyes.
What are the MAIN COMPONENTS of this system and in what DIRECTIONS does it continue to develop? Let us turn to Diagram 1.3.1.
We shall begin with the TECHNOLOGICAL BASE of today's industrial society, including its MEANS OF PRODUCTION (i.e., material factors machines, different kind of equipment, etc.) and MANPOWER (i.e., human factor).
* The principal specific feature of the modern SYSTEM OF PRODUCTION consists in MACHINE TECHNOLOGY applied for making (manufacturing) practically everything, including MACHINES themselves. We shall call this historically NEW phenomenon the "MACHINE production of MACHINES". Therein lies the fundamental difference of the INDUSTRIAL society and INDUSTRIAL production from the epoch of HANDICRAFT, i.e., of MANUAL work and its ingenious "MANUFACTURE" organization.
There is a widespread, albeit wrong, idea that the transition to MACHINE SYSTEMS is dated nearly from the mid18th century. However, their MASS APPLICATION in mechanical engineering itself (or, using another term, in MACHINERY industry) was first observed only on the eve and during the World War I, i.e., in the first TWO decades of the last century. As for the American industrial boom of the 1920s (preceding the "Great Depression" of the 1930s) and the World War II, both gave a strong impetus to further spreading of INDUSTRIAL TECHNOLOGIES and to deep REORGANIZATION of BIG BUSINESS thus highly accelerating the ECONOMIC DEVELOPMENT process (we shall return to these questions in following Topics).
Among other things, this period brought a steep rise in the EFFICIENCY of the INDUSTRIAL PRODUCTION through the socalled "scientific organization" of the WORK PROCESS (or "Taylorism" by the name of its inventor), as well as through the use of CONVEYER (ASSEMBLY LINE) as the technological base of MASSSCALE PRODUCTION (sometimes also labeled "Fordism" after Henry Ford I).
We can state that the first "rough" stage of INDUSTRIALIZATION as a UNIVERSAL form of ECONOMIC DEVELOPMENT in the socalled "civilized world" generally ended by the MIDDLE of the 20th century. Since then, in growing parts of the world, this cumulative process of ECONOMIC DEVELOPMENT is taking a new form, which received the name of TECHNOLOGICAL REVOLUTION.
Among other features, it is characterized by such NEWEST TENDENCIES in the development of material and technical (technological) base of modern production as wide appliance of CONTINUOUS processes ( first of all in the CHEMICAL industry), AUTOMATION and ROBOTICS; a breakthrough is also taking place in the sphere of BIOTECHNOLOGIES (remember the “blackbox” principle!) and of NANOTECHNOLOGIES (based on principle of manipulating matter on an atomic and molecular scale).
So far, however, MACHINE TECHNOLOGIES (but no longer always MECHANICAL ones) still prevail. Of course, these technologies themselves continue to improve. As PROGRAMcontrolled technologies, new generation of AUTOMATIVE lines of production and ROBOTS (robotics) continue to develop. The MACHINE as a functional system more and more often includes a NEW (fourth) component: a CONTROL DEVICE; traditional machines included three blocs i.e., the ENGINE (motor), the TRANSMISSION and the WORKING INSTRUMENT (tool) like cutter or drill, while the control function was performed by living people, i.e., by MACHINISTS (machine operators) see Diagram 1.3.2.
* All this not only radically changes the POSITION of MAN in the production system, but also advances fundamentally NEW DEMANDS on manpower itself, i.e., brings NEW CRITERIA for assessment (evaluation) of WORKING PERSONS.
For the conditions of the first ("rough") stage of industrialization, it was the QUALIFICATION of workers and engineers that formed the main criterion in assessing their QUALITIES as personnel (line and staff) of the plant or the factory i.e., as production factor. And QUALIFICATION was (and still is) understood as their level of proficiency, i.e., the level of professional skill of the working persons, depending first of all on their practical (production) experience.
In contrast to that, and according to modern views on "HUMAN CAPITAL", it is NOT qualification, but the socalled COMPLEXITY of manpower that serves as the base for the assessment of working persons. The MORE complex the MANPOWER is, the MORE complex and important the PRODUCTION FUNCTION of the worker in question can be, the MORE complex is WORK itself to which this person is fit, and the better are RESULTS of its efforts (measured in PRODUCTIVITY, EFFICIENCY, PRODUCT CHARACTERISTICS, etc.).
These very qualities of a working person, which can be summed up under the term "COMPLEXITY", depend on the total volume of EDUCATION this person has received FROM kindergarten, through 1112 years of ordinary school, and UP TO graduating from special institution of higher learning, like UNIVERSITY (polytechnic or humanitarian) or VOCATIONAL TRAINING SCHOOL (TRADE SCHOOL) of some kind. In many cases, education stretches even further – through the GRADUATE and/or POSTGRADUATE course, or the SECOND UNIVERSITY, or through some other form of additional learning (what the Germans call "die Weiterbildung"). On the whole, such a modern, very prolonged educational process takes about 16 22 years, and more.
The modern production asks for highly educated people, with wide intellectual horizon and deep understanding of his or her own place in the production system. They should be capable of evaluating the arising SITUATIONS and available INFORMATION (including ECOLOGICAL implications which are gaining new importance) and of taking RESPONSIBILITY as well as farreaching operational DECISIONS quickly and correctly.
If we are to speak of the very latest tendencies in the development of labor force (manpower), then the MAIN of them is, to all appearance, the growing sphere of MENTAL (intellectual) work, its saturation (filling) with CREATIVE elements. Now, MAIN FIGURES (or functional roles) in ANY production system are CONSTRUCTORS and DESIGNERS, COMPUTER PROGRAMMERS and SOFTWARE CONSULTANTS, TECHNOLOGISTS and INSTALLERS (adjusters) of complex, mostly automatic equipment and NOT traditional production ENGINEERS or skilful MACHINE OPERATORS any more.
By the way, it changes the economic situation in the society MUCH MORE than the naked eye can see. For instance, it brings about NEW features in the formation of PRICES because of VERY SPECIAL character of LABOR engaged in the science and research activities. The matter is that composite MENTAL work CANNOT be reduced to simple (physical) work and evaluated in terms of WORKING HOURS.
Nowadays, it is generally RECEARCH & DEVELOPMENT (R&D) that logically finds itself in the CENTER of the integrated system of "science production sales effort". It is NOT mere chance that PRODUCTION is often characterized as "technological shops of science". Accordingly, research and development work with its CREATIVE PRINCIPLE looms ever larger in the aggregate volume of labor guaranteeing vital functions of the society.
We should specially stress the importance of the decisive shift in the MACROECONOMIC structure (i.e., GNP structure) of advanced countries away from MATERIAL PRODUCTION (agriculture, mining, manufacturing, etc.) toward NONMATERIAL PRODUCTION (sometimes even called "SPIRITUAL" PRODUCTION, because it includes such elements as science, education and arts) and SERVICE SECTOR. It is exactly this deep structural shift that gives us the right to speak of the gradual transition of individual STATES and whole WORLD REGIONS to a NEW stage of development, thus becoming what is usually called POSTINDUSTRIAL SOCIETY. In modern economic literature these and some other NEW features of MODERN ECONOMY are sometimes described as its extreme "weightlessness".
* The MODERN system of ECONOMIC RELATIONS with institutes and instruments inherent in it which serves the needs of SOCIAL PRODUCTION also substantially differs from the "Capitalism" (i.e., "rough", unregulated variety of market economy) of the 19th and even the early 20th century.
Here, the emergence of the THREE new phenomena of economic life, forming what we call the "MAGICAL TRIANGLE", are of vital importance. These phenomena are: "JOINTSTOCK property (capital) MANAGERS MARKETING".
≠ It all started approximately in the middle of the 19th century with the most revolutionary change in the economic system represented by the consolidation and wide application of JOINTSTOCK form of capital (while the first "soapbubble" variety of CORPORATIZATION has been described by Adam Smith a hundred years earlier). It radically helped overcome the financial limitations of INDIVIDUAL property, thus opening NEW VISTAS for national economic growth on a large scale. It also created a UNIVERSAL mechanism of CAPITAL MOVEMENT including its flow BEYOND the national boundaries. In this way a foundation was laid for INTERNATIONALIZATION of capital and production itself.
At the beginning of the 20th century, the wide spread of "CARTELS" (resulting from monopolist COLLUSION in the sphere of TRADE), and of "TRUSTS" (resulting from the HORIZONTAL INTEGRATION of capital through MERGERS and TAKEOVERS of individually owned private firms) had led to "rigid" sectoral MONOPOLIES. In other words, immediately after a "rough" industrialization, CARTELS and TRUSTS represented typical organization form of BIG BUSINESS in individual INDUSTRIES (iron and steel, textile, food and beverages, shipbuilding, etc.) and economic SECTORS (like retail trade or banking).
However, after the World War II, both these forms of monopolist organization have given way to a NEW phenomenon the universal spread and predominance of the socalled "CONCERNS" , i.e., of organization systems based on FINANCIAL CONTROL secured through JOINTSTOCK CAPITAL mechanism.
Accordingly, as a typical MODERN organization form of big industrial complex we shall mention the MULTISECTORIAL CONCERN (or CORPORATION) as a rule, with vertically integrated and diversified production based on profound functional (technological) INTRAFIRM division of labor (aspects which we shall discuss in the next Topic).
In the last several years (approximately, from 1996) we observe a renewal of horizontal integration processes (MERGERS and TAKEOVERS, nowadays more often called MERGERS and ACQUISITIONS – M&A). However, this time such M&A are unfolding on a HIGHER level, i.e. among the biggest CORPORATIONS, organized as MULTISECTORAL CONCERNS mentioned above, which are doing business in the MOST MODERN vertically integrated industries (like carmaking, aerospace or electronics). So, nowadays as never before, the JOINTSTOCK form of property (share capital, equity capital) shows its usefulness and advantages fullscale. For example, the famous Daimler Chrysler deal (one of the first grandscale INTERNATIONAL M&A when the leading German carmaker acquired control over the thirdinsize American automotive company for $41 billion) could never have taken place without such tools as JOINTSTOCK CAPITAL (materialized in shares) and the STOCK MARKET (or the socalled stock exchange) where such shares can be sold and bought.
The mass transition to JOINTSTOCK property and its far reaching DEMOCRATIZATION by the "diffusion of shares" in the society could not but effect the deeprooted principles of the HIRED LABOR system. The COLLECTIVIST (group) principles of property and of the production system as a whole grew in strength. The CONTRADICTIONS between wage labor (employees) and capital (employers) lost their acuteness. Favorable conditions arose for a better combination of PRIVATE (individual), COLLECTIVE (group) and COMMON (national) interests.
≠ It was jointstock property that placed modern MANAGERS, i.e., hired PROFESSIONALS with a special training and profound knowledge of their business, on top of big industrial and marketing complexes. This not only raised the COMPETENCE and QUALITY of management, but also created a certain "buffer" between owners and hired personnel, between BIG shareholders and a mass of ORDINARY holders. MANAGERS as TOP PEOPLE in modern business form the second side of the aforementioned "MAGICAL TRIANGLE".
≠ And what is the main tool, the basic principle of management at the disposal of modern MANAGER? It is exactly MARKETING the third side of this very TRIANGLE.
If we try to define MARKETING in the most general terms it is the "marketoriented concept of management". And a more sophisticated and substantial definition could sound like this: "MARKETING is a market researchbased concept of management aimed at a maximum volume of sales and a sufficient profit through serving consumers TO THE BEST of the firm's abilities".
It means that of paramount importance here is the RESEARCH EFFORT directed at finding a good MARKET RECESS ("NICHE") and at creation of such a PRODUCT (commodity) for the SPECIALIZATION of the firm that would make possible a stable and ever wider SELLING of it (the product) in the domestic and foreign markets, thus yielding sufficiently HIGH RETURNS on the firm's invested capital.
It is only with the aid of SCIENCE, of RESEARCH and DEVELOPMENT (R&D) that advanced firms are capable to arrange business according to results of their MARKET SURVEYS.
MANAGERS study everything necessary for taking competent DECISIONS, i.e., all the aspects of the MARKET situation and trends of its development including:
tendencies in the evolution of the PRODUCT itself, its varieties and variants of use (PRODUCT DIFFERENTIATION),
the dynamics and structure of SALES, their analysis and forecasts for individual types of products and groups of purchasers (MARKET SEGMENTATION),
identification of the CIRCLE OF CONSUMERS to whom the chosen variety of PRODUCT would be offered (PRODUCTION PROFILE and MARKET NICHE),
the methods of ADVERTISING and PROMOTION for the individual products (MARKETING MIX).
They also study production and marketing experience of COMPETITORS, as well as their INTENTIONS – so as to delimit (to separate) the spheres of action with them as EARLY and as FAR as possible, thus reducing the possibility of CLASHING with them at the final stage of the SALES EFFORT (i.e., on the MARKET itself).
However, such are only the principal components of MARKETING RESEARCH. There is also BASIC (fundamental) and APPLIED science, firms are engaged in research and development of a purely TECHNICAL and TECHNOLOGICAL nature, and that is where the center (core) of research and development activity in the firm (i.e., of its R&D system) is commonly found.
MARKETING answers the question as to WHAT is to be produced and FOR WHOM, whereas an answer to the question as to HOW it can be practically done (i.e., exactly HOW to assure LOW unit costs and HIGH quality) should be given by other parts of the firm's R&D.
* However, nowadays in securing a SOCIALLY VALUABLE production structure and preventing recessions or stagnation of its volume in individual sectors and in the framework of the national economy as a whole, the role of the STATE and of its REGULATIVE ACTIVITY gets a paramount importance.
There are numerous MODELS of modern economic regulation executed by the STATE through its special ORGANS (bodies), which can be summarized into THREE main groups:
# KEYNESIAN approach (named after the wellknown British economist of the 1930s John Maynard Keynes) with following main specific features:
predominantly DIRECT influence on the economy, first of all – through an active TAXATION policy and massive government SPENDING in times of recession,
considerable STATE SECTOR in industry and utilities,
relatively big STATE BUDGET with rich social programs, tolerance in regard to budget DEFICITS (common use of the socalled deficit financing),
main attention to the DEMAND side of the economy and tools aimed at stimulating the AGGREGATE DEMAND, especially in the periods of production slumps (recessions) the socalled "DEMANDSIDE ECONOMICS" approach,
major SOCIAL GOALS of Keynesian methods of economic regulation "full employment", stable and adequate investment process and industrial growth, bringing some elements of "social justice" to the economic system (like American President L. B. Johnson tried to do with his concept of "Great Society").
# MONETARIST approach (developed mostly in the 19601970s by the socalled "Chicago School of Economics" headed by Milton Friedman) with following typical features:
MINIMAL interference into ECONOMY based mostly on INDIRECT methods, while the MAIN STRESS is being made on regulating the MONEY SUPPLY – the major idea of the MONETARIST POLICY,
minimal STATE SECTOR, as much as possible of FREE MARKET ECONOMY conditions,
generally LOW TAXES, NOT big and strictly balanced BUDGET, NO or very modest SOCIAL PROGRAMS.
many ideas of the GOP (the Republican party) in the U.S. concerning its fight against "BIG GOVERNMENT" and for "TAX CUTS" and "BALANCED BUDGET" are taken from the MONETARIST arsenal.
# NEOCONSERVATIVE approach (developed in the 1980s in the U.S. in form of the socalled "REAGANOMICS", in Great Britain under M. Thatcher, in France under F. Mitterrand and in Chile under General Pinochet). It is characterized by a certain SYNTHESIS of the first two approaches, but mainly on the base of the SECOND one, i.e., closer to the MONETARISM. It includes:
mostly INDIRECT influence on the economy through regulating of the MONEY SUPPLY and the BANK RATES,
REPRIVATIZATION of all inefficient components of the STATE SECTOR, i.e., its "streamlining,"
generally LOW TAXES and government SPENDING, balanced BUDGET, as few as possible SOCIAL PROGRAMS (components of the "SMALL GOVERNMENT" policies).
main interest to the SUPPLY side of the economy and tools aimed at influencing PRODUCTION conditions – the socalled "SUPPLYSIDE ECONOMICS" approach recommended by some influential modern economists.
* There is a kind of general CONSENSUS in modern political world concerning STATE REGULATION in principle. It represents something like this:
"Government policy can direct a country's economy in ways the market alone could not. Still, INDIRECT ways and means of influencing economic processes are preferable over the DIRECT ones, and there should be as LITTLE state interference as possible. Too much government or misguided government can subvert economic growth.”
Typically, practice shows that nations with FREER economy grow FASTER than STRICTLY REGULATED (Russia and Japan undoubtedly belong to the LATTER group; both are in badly need of further DEREGULATION).
However, NATIONAL SYSTEMS of economic regulation which we can observe in individual countries are very DIVERSE both in their methods and efficiency. For example, there are many STRONG as well as WEAK points characterizing American government policies in comparison with those of European countries and the European Union as a whole (or with Japan, for that matter). Thus, active JOB CREATION mechanism and high INVESTMENT EFFICIENCY are but TWO of several ADVANTAGES the United States enjoys thanks to its very specific ECONOMIC SYSTEM based rather on "freedoms to fail and to get rich" than on the efforts by the state (federal government) to prescribe and influence the WAY business is done.
The above traditional attitudes toward GOVERNMENT and its REGULATIVE functions have, however, undergone profound and variable changes in the course and as a result of the modern FINANCIAL AND ECONOMIC CRISIS. In America, in Europe, in Australia and in Latin America new interest in government INSTITUTIONS and POLICIES can be observed. High on the agenda of such multilateral political and economic organizations as the UN, WTO, IMF and the World Bank figure new topics like the necessity of more strict and effective INTERNATIONAL REGULATION in such fields as CREDIT and FOREIGN INVESTMENT, as movement of HOT MONEY, and the like.
* The next important feature in the evolution of the ECONOMIC RELATIONS of the modern industrial and postindustrial societies is a wide spreading of SPECIALIZATION and COOPERATION of production.
Thus, characteristic for the modern economic relations is a very HIGH grade of SPECIALIZATION which provides for MASSSCALE production and LOW production COSTS.
Typical is also predominance in modern industrial society of very COMPLEX and SOPHISTICATED products assembled from tens, hundreds and even thousands of individual PARTS (components) which necessitates strict COORDINATION of efforts of many producers and their steady COOPERATION, more often than not on a longterm CONTRACTING (SUBCONTRACTING) basis. Thus, the production of such COMPLEX (composite) goods is mostly arranged in form of long technological CHAINS (or technological NETWORKS) typically involving participation of many DIVISIONS of the same company (the INTRAFIRM cooperation with the use of TRANSFER PRICES) and/or of independent partners ("outsiders") on the SUBCONTRACTING basis. Here, the OLIGOPOLY structure of production and markets clearly shows its great potential.
* Specialization and cooperation of production, emergence on this basis of technological chains and networks – all this asks for efficient USE of resources and their timely and accurate TRANSFER from link to link. The TIES between individual links become highly COMMERCIALIZED (i.e., they mostly are of the INDIRECT type). Such ties presuppose largescale TRADE (or, at least, QUASITRADE) also WITHIN a corporation, i.e., MARKET EXCHANGE of different resources (raw materials, intermediary products, components and related services) between its individual parts (links). And all this raises the importance of ACCOUNTING and CONTROLLING, of all sorts of CALCULATIONS, as a rule in MONEY terms (in other words, of calculations using the MONEY units, very often the U.S. dollars).
So, MONEY itself changes its nature, serving within such technological CHAINS first of all NOT as an expression of VALUE, but rather as a TOOL of CALCULATIONS. We can clearly notice that a quite NEW function of MONEY is thus emerging, i.e., the ACCOUNTING function. That's why we can say about modern MONEY that it has become, to a substantial degree, "MONEY OF ACCOUNTING" (or we can say "ACCOUNTING MONEY", "CALCULATION MONEY").
With the development of modern production which brings about strong tendencies toward DECENTRALIZATION and COMMERCIALIZATION of INTRAFIRM STRUCTURES (i.e., of functional and organizational intracorporate systems), as well as toward ever wider use of the CONTRACT relations of all kinds, the ROLE of such "accounting money" is visibly growing.
At the same time, the role of CREDIT and of all sorts of NEWEST credit facilities is also increasing, as well as that of "electronic money" (i.e., of MONEY forming the deposits of modern banks and used in many everyday transactions inside COMPUTERIZED systems). And, of course, further revolutionary changes are being brought by a rapid development of the socalled "ONLINE SHOPPING" (i.e., of "ECOMMERCE" and/or “EBUSINESS”) – in other words, by ever wider use of the INTERNET to satisfy consumer demand DIRECTLY, avoiding traditional RETAIL channels and facilities.
* Finally, the entire economic system of the industrial society is greatly influenced by the massive process of INTERNATIONALIZATION of practically all sides of economic life. In this, MAJOR ROLE is being played by the expansion of the sphere of DIRECTLY INTERNATIONAL PRODUCTION of the socalled TRANSNATIONAL CORPORATIONS (TNC) the subject we shall analyze in detail in the following two Topics.
* As for the POLITICAL SYSTEM of the industrial and postindustrial societies, here we can stress the importance of the PARLIAMENTARIAN FORM of DEMOCRACY typical for them and already bearing quite UNIVERSAL character. A developed PARLIAMENTARIAN SYSTEM based on the principle of the DIVISION OF POWER between LEGISLATIVE, EXECUTIVE and JUDICIAL organs is a source of stability and social progress.
After more than half a century of instability, after two WORLD WARS and a long period of TOTALITARIAN RULE in a big number of countries in practically all parts of the world, the majority of modern civilized societies have chosen DEMOCRACY and have been developing their own kind of PARLIAMENTARIAN SYSTEM (very often using as MODELS the American or British experience).
Nowadays, many TRANSITIONAL SOCIETIES, including a number of "POSTSOCIALIST" countries and a big part of the DEVELOPING WORLD, are also going the way of parliamentarian democracy. Still, the ROAD TO DEMOCRACY often turns out to be LONG and full of OBSTACLES. Thus, in Asia, the CONCEPTS governing the public approach to DEMOCRACY itself and to HUMAN RIGHTS issues in particular are very SPECIFIC. One example represents the concept of the socalled “Asian values” (allegedly in contrast with “Western values”), which are deeprooted in Confucian tradition and formed under strong influence of other cultural and political elements of Asian nations' historical heritage. This is true not only in regard to China, but to some Asian noncommunist countries as well (from the Philippines, South Korea and Taiwan to Japan itself).
As for Western democracies, it should be stressed that in many cases we can clearly see in their government (state) economic policy elements of the socalled "SOCIAL REFORMISM", i.e., of striving to a certain harmonization of interests in the society and to NATIONAL ACCORD (Sweden, Canada, Germany, the Netherlands, some others). Using very famous words, one could say that in a number of rather advanced countries the 20th century has affirmed itself as "a century of the socialdemocratic consensus".
At the same time, it is worthwhile to notice that practically everywhere in the developed world sociallyoriented government policies are being implemented on the background of a wide and influential POLITICAL MOVEMENT against "BIG GOVERNMENT", against too much WELFARE (especially for IMMIGRANTS), and in favor of a strictly BALANCED STATE BUDGET.
Topic 4. TECHNOLOGICAL DIVISION OF LABOR AND ITS ECONOMIC AND POLITICAL CONSEQUENCES
As we already know, SOCIAL DIVISION OF LABOR forms the organic basis of the MARKET ECONOMY and serves as one of major PREREQUISITES of its development in individual nationstates and on international scale.
We shall specially devote next Topic to modern issues of INTERNATIONALIZATION of economic life and to the main features of modern world economy as the GLOBAL SYSTEM of economic interaction and interdependence of states and nations. However, it is worthwhile to stress the vital and universal influence of the INTERNATIONALIZATION processes on the SOCIAL DIVISION OF LABOR both on the national and on the global (worldwide) scale as early as possible, i.e., right now, when our attention is turned to the TECHNOLOGICAL aspects of modern economic development and its social and political consequences.
* Basically, there exist TWO main forms of the SOCIAL DIVISION OF LABOR (both in "closed" national economies and on "open" world markets) which are functionally interconnected with TWO different forms of the SPECIALIZATION OF PRODUCTION:
COMMERCIAL (or COMMERCEbased) division of labor, and
TECHNOLOGICAL division of labor.
#COMMERCIAL DIVISION OF LABOR. For centuries, the socalled OBJECTbased (PRODUCTbased) SPECIALIZATION represents such a profile of production which is restricted to the output of certain GOODS (COMMODITIES) intended for sales on an OPEN market and based on a COMPLETE technological system arranged WITHIN the producing company. It was especially typical at an EARLY stage of INDUSTRIALIZATION and gave rise to rapid development of COMMERCIAL trade, both on domestic and international scale, in the 18th and 19th centuries, as well as in the first half of the 20th century.
So, it is exactly the OBJECTbased SPECIALIZATION that breeds COMMERCIAL TRADE with its classical and highly traditional model of the SOCIAL DIVISION OF LABOR (to put it briefly: individual producers manufacture their goods from start to finish and offer them on an open market at home or abroad)
#TECHNOLOGICAL DIVISION OF LABOR. However, there are also OTHER forms of SPECIALIZATION OF PRODUCTION.
1. One of them is the socalled PIECEbased (DETAILbased) SPECIALIZATION when individual production units (plants, factories) manufacture certain DETAILS (blocs, knots) for use as COMPONENTS on the assembly lines of OTHER firms manufacturing COMPOSITE GOODS. In their turn, these modern sophisticated FINISHED GOODS can be designed for use in different SECTORS OF ECONOMY as their MEANS OF PRODUCTION (composite INVESTMENT goods – like complete machines, machine systems, and specialized equipment). Or they can be offered on CONSUMER MARKETS – composite DURABLE goods, like motor cars or boats, including modern household appliances (like washing machines or refrigerators), and specialized devices (like TV sets, taperecorders or PCs).
2. Please, notice that very close to this is also OPERATIONbased SPECIALIZATION when an individual producer (an independent firm or production division WITHIN a bigger company) takes over a certain FUNCTION (stage, link) of the existing TECHNOLOGICAL process and performs this particular OPERATION in strict COORDINATION with other technological links within the overall production system. Usually, such function is executed on a CONTRACTING (or SUBCONTRACTING) basis. The producer in question receives its raw materials (intermediary products and components) from the PREVIOUS link of the TECHNOLOGICAL CHAIN, performs the production OPERATION which it has chosen for its specialization, and supplies with the emerging highergrade product the NEXT stage (link) in the integrated production system. Examples of such operationbased specialization can be found in many industries, such as production of metals, wood processing, pulpandpaper industry, chemical industry, textile industry, etc.
Both these kinds of specialization foresee STEADY and LONGTERM character of relations between producers forming the technological (production) chain. Nowadays, such CONTRACTING (SUBCONTRACTING) relations more and more often are called "OUTSOURCING” because the firm gets many COMPONENTS (production factors) necessary for arranging its production process from OUTSIDE SOURCES. Usually, relations of this longstanding type secure STRICT DISCIPLINE of delivery (supply), on the one hand, and FIXED financial and other TERMS of such delivery (first of all PRICES and TERMS of PAYMENT), on the other hand.
Of course, longstanding CONTRACT relations based on OUTSOURCING visibly DIFFER from common COMMERCIAL TRADE when a firm "works" for an OPEN market (i.e., for an UNKNOWN customer) and receives PRICES it could manage to get in the course of market competition.
So, a special kind of SOCIAL DIVISION OF LABOR emerges which is based on TECHNOLOGICAL ties and is marked by some peculiar features. It is this special kind of social division of labor that we call TECHNOLOGICAL division of labor – breeding a new variety of market relations and growing in importance throughout the 20th century.
On this HIGH stage of development of modern industrial production, relations of PRODUCTION SPECIALIZATION overgrow INTO relations of PRODUCTION COOPERATION by far more strongly than ever before.
* It is common knowledge that modern economy is characterized exactly by such stable, longterm, technologically conditioned and organizationally secured relations of SPECIALIZATION and COOPERATION. Over the past few decades, PIECE and OPERATIONbased SPECIALIZATION foreseeing close COOPERATION within the industrial structure has advanced to the forefront of economic processes.
In the PREINDUSTRIAL society with its MANUFACTURE production, the TECHNOLOGICAL division of labor reached a kind of perfection. It was achieved through the use of the socalled HETEROGENOUS and ORGANIC MANUFACTURE principles (please, remember examples with organization of MANUAL production of CLOCKS and CARRIAGES, on the one hand, and SEWING NEEDLES, on the other). However, this considerable historical progress took place
on a MANUALLABOR basis (or we can also say on a HANDWORK basis), and
as INTERNAL division of labor i.e., within individual WORKSHOPS (production units) only.
Nowadays, principles of TECHNOLOGICAL DIVISION OF LABOR have NOT only exceeded (overgrown) the limits of isolated PRODUCTION ENTITIES (units), i.e., the limits of workshops, factories, or production complexes of individual companies. More, they freely reach across STATE BORDERS, stretching over oceans and seas, binding together producers in different countries as LINKS within prolonged international PRODUCTION CHAINS.
Analyzing different aspects of TECHNOLOGICAL DIVISION OF LABOR, we use several new TERMS which you should well know. Among them stand out:
SUBCONTRACTING (describing the basic organizational principle and the character of relationship between individual LINKS of the technological CHAINS and NETWORKS),
OUTSOURCING (in regard to MATERIAL ELEMENTS – components, subassemblies, etc.) and OUTCONTRACTING (in regard to necessary SERVICES – like logistics, advertising and promotion, etc.),
SUPPLY CHAIN (describing the DESIGN, SCHEME or SHAPE of the technological process), and finally –
OFFSHORING (with a stress on the fact that the OUTSOURCING relations have INTERNATIONAL (TRANSBORDER) character.
* The fact that the TECHNOLOGICAL DIVISION OF LABOR has overstepped the bounds of the firms, industries and national economies is seen in emergence of giant international sciencebased production and marketing COMPLEXES. These are arranged as long and ramified technological CHAINS (or NETWORKS) with their LINKS in different countries and even on different continents.
First of all, we have in mind the socalled TRANSNATIONAL CORPORATIONS (TNC) with headquarters in North America, Europe, Japan and Australia that serve as a cementing principle and organizational form of such international (regional and global) systems of production SPECIALIZATION and COOPERATION.
Generally, a TNC is a NATIONAL company according to CAPITAL it represents (for example, American, Dutch or Japanese), which has OVERSTEPPED its national boundaries and is acting on a REGIONAL and/or GLOBAL scale, binding together many production and marketing LINKS placed in different countries into a wellcoordinated CHAIN (overall system, or network) of supply, manufacturing and sales.
In this manner, INTERNATIONAL lines of production and marketing networks come into being, based on adequate organizational principles. Thus, a NEW variety of production emerges which we can call "DIRECTLY INTERNATIONAL PRODUCTION". Its PRODUCTS, aimed at INTERNATIONAL MARKETS, also are quite different in their essence from traditional exportoriented national products of the previous period. These are also "DIRECTLY INTERNATIONAL PRODUCTS" containing parts (components) with origin in different countries. It is only conditionally (i.e., with many reservations) that they could be labeled as "Made in U.S.A." or "Made in Japan". Actually it would be more correct to label them "Made by IBM" or "Made by Mitsubishi". By the way, you can find such kind of labeling products ever more often nowadays.
For example, within its regional automobile production system, Mitsubishi uses exchange of transmissions made in its plant in the Philippines for engine parts and bumpers made in Thailand. Engines made in Australia are exported to Japan, and car doors made in Malaysia are shipped to Thailand.
Similar geographically dispersed production system has also been created decades ago by Ford Motor (Europe) for manufacturing its wellknown Ford Escort model.
Or, still another example: manufacturing locations, marketing headquarters and distribution centers of the famous North American heavyequipment manufacturer Caterpillar can be found on ALL continents and form WORLDWIDE production and marketing NETWORK.
* The emergence of DIRECTLY INTERNATIONAL PRODUCTION, connected with TECHNOLOGICAL DIVISION OF LABOR, i.e., with relations of PIECEbased and OPERATIONbased SPECIALISATION and COOPERATION of production (labor), opened an era of OLIGOPOLY market structures on a GLOBAL scale. Not only within national boundaries OLIGOPOLY serves now as the major form of production and market organization bringing about fruitful symbiosis of BIG, MEDIUMSCALE and SMALL business. Every modern TNC has developed a ramified (widespread) NETWORK of SUBCONTRACTING relations with hundreds and thousands of smaller producers around the world. This means and explains the absolute predominance of OLIGOPOLY STRUCTURES in all major sectors of the world economy, first of all in industry and services.
* It should be mentioned that in their classical version SPECIALIZATION and COOPERATION were connected and developed simultaneously with VERTICAL INTEGRATION, thus servicing the functional TIEUP (integration) of the CONSECUTIVE STAGES (links) of the technological (production) process. Generally, it was a question of creating an INTEGRATED production and marketing system within a MULTISECTORAL CONCERN, thus binding together the functions of its individual links acting in different INDUSTRIES and SECTORS of economy (and very often in different COUNTRIES, for that matter).
However, let us first return to HORIZONTAL INTEGRATION mentioned in Topics 2 and 3. This term describes the processes of CENTRALIZATION (reorganization) of CAPITAL within a certain INDUSTRIAL SECTOR through MERGERS of individual firms and their TAKEOVERS (also called "ACQUISITIONS") by big producers (monopolies) leaders of the industry in question. Historically, HORIZONTAL INTEGRATION with its mergerandacquisition mechanism (often abbreviated as "M&A") gave birth to TRUSTS a typical organizational form of "rigid" monopolies in INDIVIDUAL industrial sectors on early stages of INDUSTRIALIZATION.
In contrast to this, VERTICAL integration is developing on an INTERSECTORAL basis, i.e., secures technological ties between production units belonging to DIFFERENT industries within individual BIG COMPANIES (TNC, arranged as multisectoral international CONCERNS). This form of business organization is based on JOINTSTOCK property relations and on the mechanism of FINANCIAL CONTROL over individual elements which make up the system (this latter includes the socalled "MOTHER" company holding the control package, the "DAUGHTER" companies, the "GRANDCHILDREN" companies, etc.).
* An important NEW feature characterizes further development of VERTICAL INTEGRATION of industrial production: its DIVERSIFICATION, which leads to emergence of ever more COMPLEX production structures and to growing variety of OUTPUT of such industrial complexes.
One and the same big company can produce, for instance, sophisticated military equipment (ordered by the ministry of defense), precision automatic machine tools (for use by other industrial firms) and, let us say, trading equipment (for use in department stores) and household appliances (for individual consumers). Or as another example: the production of tanks for the army and heavy trucks (trailers, lorries) for transportation companies can be combined with the output of small garden tractors or light airplanes for individual families. Or: a company produces sawn lumber and wood components for use in the construction industry, and at the same time manufactures furniture and many kinds of pulpandpaper products (like newsprint, tissue paper, cardboard).
It is worthwhile to notice that the product DIVERSIFICATION can be effected for different reasons. Let us name THREE of them:
# a variety of goods can be obtained by processing one and the same initial RAW MATERIAL in a complex way (ferrous metals, aluminum, wood, asbestos, etc.),
# there are firms oriented on fullscale servicing of a definite type and circle of PURCHASERS (for example, FARMERS need harvester combines and tractors, subsidiary equipment to use on them, mineral fertilizers and other chemicals, high quality grain as seeds, pedigree cattle, fodder, milking machines, wind driven electricity generators, and what not),
# DIVERSIFICATION can also be based on TECHNOLOGICAL SIMILARITY of different lines of production which, in particular, makes possible to install ELECTRONIC CONTROL over them using ONE complex electronic network (for instance, over the production of many kinds of plastics and articles made from them).
Thus, we have named THREE sources of business diversification:
# common RAW MATERIAL BASE for integrated and diversified production,
# common MARKET BASE for arranging complex servicing of a certain type and circle of PURCHASERS (i.e., buyers, users, consumers)
# common TECHNOLOGICAL BASE for achieving high grade of production coordination through use of electronic devices.
* TECHNOLOGICAL CHAINS arising in the course of VERTICAL INTEGRATION and subsequent DIVERSIFICATION of production may widely differ in form (for some examples see Diagram 1.4.1).
Of course, those are very simplified cases which suit only to illustrate the PRINCIPAL BUILD of multisectoral production systems. In real life, there are very sophisticated and refined production structures including VERTICAL, HORIZONTAL and DIAGONAL elements and directions of influence (see Diagram 1.4.2).
As a good example can serve "PESIC" systems used by the wellknown Japanese "superfirm" Omron Corporation in its diversified production of modern electronic measuring and controlling equipment (PESIC means: Project Elements Service Information Construction). Such systems are used both in the sphere of BUSINESS MANAGEMENT and in the sphere of R&D.
Thus, CORPORATE MANAGEMENT (“CORPORATE GOVERNANCE” in American parlance) is highly decentralized and includes:
# VERTICAL elements formed by DIVISIONS for manufacturing individual groups of products, including the very newest (sensors, relays, control devices, etc.). Such DIVISIONS are, in fact, acting as individual MEDIUMSIZE FIRMS (Kazuma Tateishi, the founder of Omron Corporation: "Financial anxieties help teaching people, thus forming good employees").
# HORIZONTAL elements formed by different SERVICES within the OVERALL corporation structure (administration, R&D, marketing, accounting, production, sales, logistics, overseas operations, etc) which serve the needs of individual divisions.
# DIAGONAL elements formed by specialized FINANCE and PERSONNEL services and the systems of STRATEGIC PLANNING and INFORMATION which service BOTH the divisions and the company as a whole.
The deepprofiled company of today is sometimes called HOLONIC company stressing the idea of UNITY between its PARTS ("on") and the OVERALL STRUCTURE (from "holos" meaning "whole", "universal"). It is aimed at achieving HARMONY between the COMPONENTS of the system and the SYSTEM as such.
By the way, MULTIPOLAR diversification and HOLONIC integration have been regarded as the TWO most important tendencies of the 1990s in the field of BUSINESS ORGANIZATION.
The FIRST of them means that the company centers its business activity around several definite DIRECTIONS (i.e., around several basic INDUSTRIAL SECTORS, or other SPHERES of economy), while the SECOND stresses the need of COORDINATION and a certain BALANCE between such individual spheres of company's business activity .
Both tendencies mirror the fact that modern BIG BUSINESS ever more often disperses its activities among many directly (technologically) unrelated spheres thus taking form of MULTISECTORAL CONCERN (often also known under the name "CONGLOMERATE") kept together (integrated) mostly by the widespread system of FINANCIAL CONTROL through SHAREHOLDING (see Diagram 1.4.3).
Such organizational structures are also called "flatter hierarchies" where rather few MANAGERS with big operational AUTHORITY are in charge of many PEOPLE working in several TECHNOLOGICAL SYSTEMS within the CORPORATION (CONCERN). And the principle of OPERATIONAL INDEPENDENCE of DIVISIONS, when each of them is acting in a manner of a MEDIUMSIZE FIRM doing its own business, received picturesque description as "SticktoYourKnitting" principle.
*Both "CONGLOMERATION", as well as technological division of labor based on VERTICAL INTEGRATION and DIVERSIFICATION, become ANTIPODES (enemies) of strictly CENTRALIZED organizational structures. So, a strong tendency towards DECENTRALIZATION and greater operational INDEPENDENCE of individual production divisions and other elements of the corporation system is growing. Accordingly, a new parallel tendency arises to COMMERCIALIZE the INTRAFIRM turnover (i.e., relations between autonomous elements of the system).
This tendency of COMMERCIALIZATION is now traceable not only in the relations BETWEEN individual DIVISIONS of MULTISECTORAL CONCERNS, but also deeper – WITHIN such DIVISIONS, i.e., between their functional LINKS. Those links belonging to the INNER STRUCTURE of the concern are, as a rule, forced to COEXIST (and sometimes – to COMPETE) with independent firms, also "builtin" into concrete TECHNOLOGICAL CHAIN arranged by the concern through SUBCONTRACTING relations.
* All in all, THREE important new tendencies exist and interact and all THREE are connected with the deepening TECHNOLOGICAL DIVISION OF LABOR, i.e., with spreading relations of SPECIALIZATION and COOPERATION, and with VERTICAL INTEGRATION and DIVERSIFICATION processes.
# One of the tendencies is expressed in DECENTRALIZATION of the corporation structures, i.e., their "CONGLOMERATION" with growing autonomy of production DIVISIONS (the spread of "flatter hierarchies" mentioned above).
# The second tendency provides for COMMERCIALIZATION of relations between DIVISIONS within the COMPANY (corporation, concern) and between particular ELEMENTS (technological links, services) within DIVISIONS.
Accordingly, the sphere of DIRECT (administrative) TIES and DISTRIBUTIVE relations tends to shrink, the FREEOFCHARGE (gratuitous) TRANSFER of resources DECLINES, while the role of INDIRECT TIES and COMPENSATIONbased relations is GROWING.
MARKET with its capacity for COMPETITION insistently asserts itself and penetrates deep into corporate structures.
# The third tendency is expressed in growing scale of stable longterm relations based on SUBCONTRACTING of INDEPENDENT PRODUCERS from outside own production system of the CONCERN (corporation). This is classical OUTSOURCING, we can say. Such modern TECHNOLOGICAL COOPERATION, as a rule, foresees the use of SUBCONTRACTORS on a permanent basis.
Servicing the development of COOPERATION in the national economy and on international scale, SUBCONTRACTING imparts more and more elements of ORGANIZATION to the commodity exchange (trade). At the same time, however, such SUBCONTRACTING relations are COMMERCIAL (compensationbased) by their nature and do NOT interfere with successful functioning of the MARKET mechanism.
* International business activity of LEADING INDUSTRIAL CONCERNS takes global dimensions, while by the sheer volumes of their sales and assets such GLOBAL FIRMS become comparable in size with whole COUNTRIES, even with such highly developed ones as some of European economies, i.e., with their gross national products GNP .
The last several years, and especially 1998 2008, brought with them something very NEW, and at the same time something basically very FAMILIAR from the last century's history, i.e., an unprecedented WAVE of "domestic", but mostly international, MERGERS and ACQUISITIONS .
So, the HORIZONTAL INTEGRATION is back, taking new form of MERGERS AND ACQUISITIONS among biggest, strongest and most diversified CONCERNS of the modern world.
This is a continuation of "MULTIPOLAR DIVERSIFICATION" and "CONGLOMERATION" processes under the NEW conditions of GLOBALIZATION of markets and business relations in general. As is well known, GLOBALIZATION intensifies COMPETITION on international markets and makes the STRUGGLE among biggest producers for LEADERSHIP and CONTROL over oligopoly structures the decisive factor of BUSINESS SUCCESS.
Now, the JOINTSTOCK form of PROPERTY ever more often services such "GIANTS' WEDDINGS", because practically ALL such M&A deals involve sellingbuying or mutual exchange of SHARES representing considerable parts of corporations' CAPITAL and usually transferring CONTROL to the more powerful of the TWO partners (like was the case with German DaimlerBenz AG in its infamous alliance with American Chrysler Corp. thus forming DaimlerChrysler under Daimler's control).
As another example of such giant M&A can serve the 1999 acquisition of control over Nissan Motor Co. by French Renault SA the very FIRST "friendly takeover" of a major Japanese company engaged in AUTOMOBILE INDUSTRY by a leading European car producer and the SECOND strong case of foreign infiltration into this vital sector of Japan's economy after Ford Motor bought control over Mazda in 1995.
* If we turn to Japan, here historical transition to OLIGOPOLY conditions and development of the TECHNOLOGICAL variety of the social division of labor had their strong NATIONAL IDENTITY.
Each of many existing KEIRETSU as specifically Japanese intramarket groups (i.e., formed around a SINGLE large industrial company that operates in a SINGLE market) aim at coordinating activities and securing efficiency within concrete PRODUCTION COOPERATION system (please, remember material of Topic 2). Thus, it is a MIXED system of FINANCIAL CONTROL and SUBCONTRACTING securing TECHNOLOGICAL coordination and PRODUCTION COOPERATION links.
As for ZAIBATSU, often regarded as intermarket groups, they represent a kind of "LOOSE CONGLOMERATES", i.e., seemingly random clusters of formally independent companies, linked MORE by shared traditions than by financial control as such. In practice, each zaibatsu is a kind of ramified and fiercely competitive OLIGOPOLY system dominated by familyowned HOLDING company but with much operational and financial independence of its individual elements (divisions, subsidiaries).
We can also look at keiretsu and zaibatsu from a purely TECHNOLOGICAL point of view. In such a context, we can say that keiretsu usually represents organizational structure which services ONE particular TECHNOLOGICAL CHAIN (or NETWORK), like that in automobile production. At the same time zaibatsu collects "under one roof" SEVERAL different TECHNOLOGICAL SYSTEMS, servicing production in SEVERAL industrial sectors. Thus, the degree of DIVERSIFICATION characterizing modern zaibatsu is much HIGHER than that of keiretsu.
* Generally, organizational structures prevailing in Japanese MANUFACTURING are rather unusual. Partly, it is connected with their historical genesis which started way back in PREINDUSTRIAL era.
In Europe and America, it were, first, the INDUSTRIAL REVOLUTION and, later, modern TECHNOLOGICAL PROGRESS that determined the shaping of BIG BUSINESS and its evolution from TRUSTS (as predominating form of MONOPOLY) toward MULTISECTORIAL CONCERNS (and wide spreading of OLIGOPOLY RELATIONS).
As for Japan, some authors point out that here the growth of BIG BUSINESS and its GLOBALIZATION (i.e., the emergence of Japanbased TNC) was rather MARKETINGoriented than TECHNOLOGYoriented. It means that, historically, considerations of TRADE expansion and COMMERCIAL experience lay at the core of Japan's INDUSTRIAL and INVESTMENT policies.
However, NOWADAYS also in Japan, it is exactly TECHNOLOGY that dictates new forms of business organization and evolution of economic relations. We have to pay attention to major TRENDS characterizing modern development of SCIENCE and TECHNOLOGY and try to evaluate their economic consequences.
There are arguments around the question whether we should regard Japan as a POSTINDUSTRIAL society or NOT. It is a complicated issue, but ONE THING is clear: RIGHT NOW the accumulation of "POSTINDUSTRIAL" features in Japan's social and economic structure and challenges of a POSTINDUSTRIAL era are among the strongest FACTORS shaping this country's future. Many crucial issues, from the choice of a new INTERNATIONAL SPECIALIZATION in the GLOBAL ECONOMY to the reforming of the whole Japanesestyle EDUCATION SYSTEM, should be analyzed exactly in a POSTINDUSTRIAL context.
* It is important to mention here that individual elements of technological chains of the emerging DIRECTLY INTERNATIONAL PRODUCTION are created also in some DEVELOPING COUNTRIES. This undoubtedly promotes their INDUSTRIALIZATION, thus introducing ever new nations to the benefits and troubles of our MACHINE CIVILIZATION.
The DEVELOPING COUNTRIES receive, as a rule, the "lower" elements of technological systems, namely, the extracting and primary processing of RAW MATERIALS. Very often this countries also house the "completing" ("assembly") links of internationally organized production with a HIGH degree of LABORINTENSITY, but with extremely LOW content of COMPLEX (composite) LABOR – because the work at an ASSEMBLY LINE (on CONVEYERBELT) is of purely executive nature.
The COMPLEX (composite) LABOR precisely characterizes the MIDDLE ("intermediate") elements of the technological chain. Usually, these elements stay in DEVELOPED (industrial) countries and are subject of the SPECIALIZATION of the "MOTHER" ORGANIZATION which arranges international PRODUCTION CHAIN (i.e., specialization of the TNC itself).
We may, in every way, criticize the socalled "NEW international division of labor", under which the TECHNOLOGICAL GAP between the former METROPOLIS and the COLONIAL periphery continues to exist, even though at a MUCH HIGHER level (please, remember the "escalator" metaphor).
Yet, INDUSTRIALIZATION there is under way, and that is one of the most important new features of our time. Moreover, let us not forget that the first dozen states that have broken away from the grip of POVERTY and are now included among the INDUSTRIAL nations (the NIC, mentioned in the Topic 1) have made this transition precisely due to their being TECHNOLOGICALLY tied to the "industrial North".
In some cases, it occurred through mutual use of their rich NATURAL RESOURCES (Mexico, Brazil, Argentina), and in other cases, it took place through the mass introduction of LABORintensive (LABORconsuming) TECHNOLOGIES with use of relatively simple (basically female) labor on the CONVEYERBELT (South Korea, Singapore, Hong Kong, Taiwan).
* Please, pay attention to the fact that, in the last decade, also the majority of the socalled "POSTSOCIALIST" societies are being integrated into world system of the TECHNOLOGICAL DIVISION OF LABOR (generally, on the same grounds as the developing countries).
For example, Russia plays major role in supplying some of its Western partners (like Germany and Italy) with RAW MATERIALS and SEMIFABRICATED PRODUCTS representing LOWER links of international production chains.
It is also thinkable that Russia, Ukraine and many other transitional economies will routinely house different LABORINTENSIVE sectors (representing UPPER links of technological systems) on a large scale.
As for Russia with its mighty TRADITIONS in solving composite TECHNOLOGICAL problems concerning modern MANUFACTURING sector (for example, in the AEROSPACE COMPLEX), it has certain CHANCES to take some INTERMEDIATE technologyintensive (scienceintensive) LINKS of international production systems sometime in the future as well.
Topic 5. INTERNATIONALIZATION AS LEADING MODERN TREND
By the deepness and scale of influence on economic life, in the late 20th century the phenomenon of INTERNATIONALIZATION can perhaps be compared only with the spreading of "collective" (group) form of private property (ownership) in the last decades of the 19th and the first half of the 20th century. Then, the consolidation of the JOINTSTOCK form of property and financing, i.e., of the STOCK CAPITAL (or SHARE CAPITAL, EQUITY CAPITAL) helped in using the potential of INDUSTRIAL REVOLUTION. In our time, INTERNATIONALIZATION of practically all sides of economic life provides for universal application of the potentialities and achievements of the SCIENTIFIC and TECHNOLOGICAL progress.
The SOCIAL DIVISION OF LABOR is taking a NEW form based on longterm TECHNOLOGICAL ties and is assuming GLOBAL character, thus producing an ever greater CUMULATIVE EFFECT due to the optimization and increased efficiency of the production structures.
The free wind of COMPETITION is penetrating through opened windows and doors of national economies blowing away the rubbish of “patriarchal” ways and feudal survival (vestige). It destroys "RIGID" MONOPOLY structures turning them into more dynamic and flexible ones typical for OLIGOPOLY, thus bringing spirit of renewal and new opportunities into economic life on international scale.
As a rule, COMPETITION on the world markets is expressed MORE CLEARLY and generally STRONGER than on national ones where MONOPOLIST TENDENCES are usually acting in much narrower territorial limits, while STATE REGULATION also sets more strict "rules of the game" for individual enterprises (firms).
As the "sealed nature" of NATIONAL ECONOMIES tends to decline, i.e., as they become more and more OPEN to foreign businesses, a certain increase in the COMPETITIVE principle has been noted, which is accompanied by a clearly proclaimed weakening of monopolization tendencies and restrictive factors.
To the extent that the STATE REGULATION also becomes INTERNATIONAL, it is ever more directed at LIBERALIZING trade and investment flows between countries, thus combating HIGH customs duties (customs tariffs) and preventing TRADE PROTECTIONISM, i.e., all sorts of artificial OBSTACLES to free international trade and normal market relations (we shall dwell upon these matters in our next Topic).
Internationally, on world commodity markets and in large economic regions, MARKET MECHANISM often proves especially effective. Here, the advantages of "ORGANIZED COMPETITION" and its favorable influence on scientific and technological progress manifest themselves relatively more fully. The potential of market selfadjustment towards its OPTIMUM, based on "MAXIMUM of competition with MINIMUM of organization (restrictions)", is more often than not realized on INTERNATIONAL scale even better than INSIDE national economies with all sorts of "authoritative", "volitional" influences.
* Now it is time to ask: "WHAT is INTERNATIONALIZATION? WHAT is it all about? WHERE can we find traces of this process and HOW can they be summed up?"
When we speak of INTERNATIONALIZATION, we have in mind CUMULATIVE PROCESS of the FORMATION OF WORLD ECONOMY as the GLOBAL SYSTEM ("superstructure") of ECONOMIC RELATIONS.
However, to explain this, we first need to name the major SPHERES of economic activity where the tendency to INTERNATIONALIZATION shows itself:
# TRADE (development of INTERNATIONAL trade leads to emergence of REGIONAL and WORLD MARKETS; EXPORTled GROWTH enables economic and social progress in many countries)
# CAPITAL (INTERNATIONAL movement of INVESTMENT capital brings FINANCIAL RESOURCES where they are mostly needed; on the other hand, the socalled "HOT MONEY" flows may become a serious destabilizing factor)
# PRODUCTION (in its functional complexity, the TECHNOLOGICAL PROCESS itself becomes INTERNATIONAL; thus, a NEW variety of production arises the "DIRECTLY INTERNATIONAL PRODUCTION" of TNC mentioned in Topic 4)
# SCIENCE (together with INTERNATIONAL PRODUCTION, INTERNATIONAL SYSTEMS of R&D come into being; issues of INTERNATIONAL TECHNOLOGY TRANSFER gain more and more public attention)
# INFORMATION (tremendous INTERNATIONAL exchange of data becomes a major NEW feature of economic life, INFORMATION and SOFTWARE industry comes into being as major and most dynamic component of GLOBAL ECONOMY)
# ECONOMIC POLICY (POLICYMAKING gets its INTERNATIONAL varieties as well; many NEW mechanisms and institutions aimed at economic DECISIONMAKING emerge on REGIONAL and WORLD scale – with INTERNATIONAL ECONOMIC ORGANIZATIONS among the most important of them)
# REPRODUCTION and ACCUMULATION of CAPITAL (these TWO major MACRO ECONOMIC processes also get their INTERNATIONAL varieties and start to involve natural resources, other production factors, as well as market outlets of several COUNTRIES – mostly NEIGHBORS, i.e., belonging to one and the same ECONOMIC REGION).
It is ALL THIS TOGETHER that forms the GLOBAL internationalization process and imparts to it CUMULATIVE (overall) character, thus making it the process of INTERNATIONALIZATION OF ECONOMIC LIFE in general.
* It all started in the 16th – 19th centuries, when many newly emerging COUNTRIES (nationstates) got involved in FOREIGN TRADE with NEIGHBORS (mostly over LAND spaces) and going OVERSEAS (this tendency was connected with GREAT GEOGRAPHICAL DISCOVERIES of that period).
Thus, towards the end of the 19th century, WORLD MARKET emerged – as a functional structure of INTERNATIONAL commercial relations – binding together the main TRADING NATIONS of that relatively early period of INDUSTRIALIZATION, as one major trend, and the METROPOLIS with their COLONIES, as another important tendency.
This functional structure (or system) signified precisely emergence of WORLD COMMODITY MARKETS – NOT less, and NOT more. Connected with OBJECTbased specialization of firms and countries and representing COMMERCIAL TRANSACTIONS between them, very often ACCIDENTAL by their nature, this system HARDLY could be regarded as WORLD ECONOMY yet.
As for WORLD ECONOMY, it represents a much MORE developed system. While the WORLD MARKET secured economic interaction and interdependence of NATIONAL companies and NATIONSTATES through COMMERCIAL TRADE, the WORLD ECONOMY adds to these interaction and interdependence RADICALLY NEW and substantially HIGHER FORMS such as "DIRECTLY INTERNATIONAL PRODUCTION" with its own mechanism and "acting persons" (TNC).
Thus, global economic SUPERSYSTEM emerges, a SUPERSTRUCTURE embracing the whole world and moving according to its own natural laws. If we look at the WORLD ECONOMY this way, it becomes clear: it is, undoubtedly, the "child" of OUR times, particularly of the late 20th century.
The unfolding of COMMERCIAL international trade and formation of WORLD COMMODITY MARKETS in the 18th – 19th centuries represented exactly the INTERNATIONALIZATION OF TRADE (or we can say "INTERNATIONALIZATION OF EXCHANGE", or "INTERNATIONALIZATION OF MARKETS"). From the historical point of view, it laid ground for INTERNATIONALIZATION of other elements of economic life, for INTERNATIONALIZATION of processes in other sectors of economy.
In modern time, the INTERNATIONALIZATION OF MARKETS goes on. The WORLD MERCHANDISE TRADE steadily leaves behind the expansion of WORLD OUTPUT, i.e., of WORLD PRODUCTION. The PRODUCT STRUCTURE of international TRADE, and its GEOGRAPHICAL DISTRIBUTION develop and modernize (exportimport data for 133 countries and their groups we shall also discuss in Topic 10).
* However, the decisive factor in the formation of the WORLD ECONOMY was the INTERNATIONALIZATION OF CAPITAL –the quite NEW phenomenon of the 20th century taking especially large dimensions after the World War II.
It started with EXPORT of LOAN CAPITAL (in form of commercial CREDITS and international LOANS many of which were granted by one STATE to another).
In contrast, nowadays, the most important form of the international CAPITAL MIGRATION is represented by FOREIGN DIRECT INVESTMENT (FDI) of the leading TNC, as well as by their PORTFOLIO INVESTMENT facilitating emergence of MIXED CAPITAL and JOINT VENTURES as major tools of economic cooperation and industrialization of the Developing World.
By the way, the absolute figures of foreign PRIVATE (both direct and portfolio) INVESTMENT flowing to developing countries by far exceed FOREIGN AID received by them.
The specific feature of the DIRECT investment is that it secures MAJOR foreign investor CONTROL over production and marketing complex created or acquired abroad (plants, warehouses, stores, etc.), while his local partners (and other MINOR investors) get only some part in the PROFITS. In this case, MAJOR investor (TNC) usually plays important COORDINATING role in arranging the international production chain.
Statistics of FOREIGN DIRECT INVESTMENT FDI show both INWARD movement, or its INFLOW (i.e., FDI coming to a particular country within a year), and OUTWARD movement of DIRECT INVESTMENT, or its OUTFLOW (FDI made by a particular country abroad, i.e., in other countries). For example, for Japan, very big capital OUTFLOW is typical, while the INFLOW of FDI to Japan remains very small indeed .
In contrast, when the FOREIGN INVESTOR plays only MINOR role in the capital formation of the created MIXED company, and an INVESTMENT PROJECT or JOINT VENTURE is being financed mostly LOCALLY (very often – out of the state budget of the developing country in question), for him, i.e., for FOREIGN INVESTOR, such money outlay will be a PORTFOLIO INVESTMENT (merely a source of PROFIT).
Important is, however, that BOTH forms – the DIRECT and the PORTFOLIO investment – are connected with development of PRODUCTION (in industrial and service sectors) and represent JOINTSTOCK CAPITAL (equity capital) on a PERMANENT basis. It is exactly the case of EQUITY FINANCING of ECONOMIC DEVELOPMENT, with all stability and other advantages inherent in it.
As for LOAN CAPITAL, it means only TEMPORAL transfer of financial resources, thus serving CREDIT relations between firms or countries (though very often also on a LONGTERM basis). LOANS (as other CREDITS) should be PAID BACK earlier or later, while JOINTSTOCK capital investment is NOT subject to RETURN (some shares might change hands, but the SUM of invested capital remains basically the same, or might even grow together with the STOCK MARKET, like it typically has been both in the U.S. and in Europe in the second half of 1990s).
So, the MIGRATION of capital and FOREIGN DIRECT INVESTMENT (FDI) as its major form serves the development of INTERNATIONAL PRODUCTION in the most direct and mighty way.
* This is the main base of the INTERNATIONALIZATION OF PRODUCTION with emergence of its DIRECTLY INTERNATIONAL variety. All the deep changes connected with such NEWEST phenomena as the "DIRECTLY INTERNATIONAL PRODUCTION" and "DIRECTLY INTERNATIONAL PRODUCTS", which we outlined in the previous Topic, came into being and expanded worldwide thanks to the factor of CAPITAL MIGRATION.
INTERNATIONALIZATION OF CAPITAL, especially FOREIGN DIRECT INVESTMENT (FDI), creates quite a DIFFERENT base for international economic relations in comparison to those formed by traditional COMMERCIAL trade. The STABILITY inherent in TECHNOLOGICAL DIVISION OF LABOR takes here its natural material shape being incorporated in complex international PRODUCTION SYSTEMS (the TECHNOLOGICAL CHAINS and NETWORKS mentioned earlier).
If we turn to Japan, it is worthwhile to notice that DIRECTLY INTERNATIONAL PRODUCTION systems created by its TNC through use of DIRECT INVESTMENT abroad are mostly placed in AsiaPacific region. In Southeast and East Asia, they take peculiar form of the socalled OFFSHORE PRODUCTION which enables Japanese firms to combine natural and human resources of several neighboring countries in a geographically dispersed but functionally integrated PRODUCTION SYSTEM based on Japanese technology.
In 1995, Japan manufactured 41 trillion yen worth of goods at its overseas plants – for the first time MORE than its whole EXPORT amounted to. In other words, Japanese firms have created a major economy OUTSIDE national boundaries (and NOT only in Asia, but in the U.S., Australia, Latin America and Europe as well). At the beginning of the new Millennium, there were more than 1700 Japanese firms doing business in the U.S. Their contribution to the U.S. export was estimated at about 9.5 percent (comprising about 43 percent of all exports by firms located in the U.S. but characterized as nonAmerican, i.e., controlled from abroad).
* In its turn, the conversion of DIRECTLY INTERNATIONAL PRODUCTION into a TYPICAL and even PREVAILING form of industrial (manufacturing) business leads to drastic changes in the sphere of CIRCULATION, i.e., in WORLD TRADE and MONETARY RELATIONS.
# We can assert that the MODEL of international division of labor with the prevalence of OBJECTbased (PRODUCTbased) SPECIALIZATION, which is mainly realized through COMMERCIAL TRADE, has been becoming a thing of the past.
The development of NEW forms of SPECIALIZATION and COOPERATION of PRODUCTION served by active MIGRATION of CAPITAL (mainly in the form of foreign DIRECT INVESTMENT) on a mass scale, pushes into forefront another MODEL – that of the TECHNOLOGICAL international division of labor.
Thus, within the WORLD TRADE we can observe a rapid increase in the already sufficiently extended SECTOR formed by stable, technologically conditioned and wellorganized COMMODITY FLOWS between the LINKS of the same TNC. According to some estimates, such INTRAFIRM exchange of goods and services with wide use of TRANSFER PRICES already covers MORE than TWOFIFTHS of the international trade turnover.
And very close to this are the CONTRACTbased longterm relations between partners in international production which stay officially INDEPENDENT from each other but operate in a COORDINATED manner – thanks to their TECHNOLOGICAL ties. Many examples of this kind we find in modern JapaneseAustralian relations, as well as in the OFFSHORE production systems created by Japanese TNC around East Asia and elsewhere.
# In the MONETARY sphere, main changes are expressed in the settingup of SPECIAL (again INTERNATIONAL) SYSTEMS of financing and SELFfinancing the development of DIRECTLY INTERNATIONAL PRODUCTION. Major NEW features of the modern MONETARY MECHANISM on the worldwide scale are:
emergence of regional and worldwide LOAN CAPITAL markets increasing credit resources for international business,
TRANSNATIONALIZATION of the banking business itself, the emergence of many TRANSNATIONAL BANKS (TNB) and the rapid buildup of their international operations
creation of NEW – "COLLECTIVE" (first of all, regional) – credit and payment facilities, like the "EURODOLLAR" markets, like the "Special Drawing Rights" (SDR) created by the International Monetary Fund (IMF), like the still NEW common European currency (the euro), all of which we shall discuss later,
the growing financial AUTONOMY of international firms (TNC), their relative INDEPENDENCE from the economic policy of individual STATES assured by creating THEIR OWN MECHANISM for raising substantial financial resources (the socalled SELFfinancing) to maintain and develop INTERNATIONAL production systems.
* The development of INTERNATIONAL PRODUCTION also calls for a visible acceleration of the INTERNATIONALIZATION of SCIENCE.
The well known and much discussed issues of the INTERNATIONAL TRANSFER of TECHNOLOGY become especially topical and politically acute when such transfer is taking place between TECHNOLOGICAL LINKS of particular TNC placed in different countries. Special bodies and working groups, created by the United Nations Organization (UNO, or UN), analyze such cases and work out recommendations for "proper behavior" of the TNC in question, thus trying to create a general "CODE OF FOREIGN DIRECT INVESTMENT POLICIES".
The LICENSE TRADE is prospering taking ever bigger part in the international trade turnover. The NEW TECHNOLOGY and "KNOWHOW" become profitable commodities, while RESEARCH and DEVELOPMENT activities ("R&D") also become ever more INTERNATIONAL. The problem of INTELLECTUAL PROPERTY RIGHTS emerges and draws public attention.
Together with the internationalization of capital and production, "DIRECTLY INTERNATIONAL SYSTEMS OF R&D" are being formed – both under aegis (i.e., through organizational efforts) of individual TNC and as international CENTERS (groups) of researchers financed by memberorganizations (states).
* In the sphere of INFORMATION not only giant INTERNATIONAL EXCHANGE OF DATA is typical nowadays, but also emergence of DIRECTLY INTERNATIONAL TELECOMMUNICATIONS SYSTEMS (both developed by big individual PRIVATE or STATE companies, like CNN or BBC, and JOINTLY formed by several independent partners with headquarters in different countries).
Regional and worldwide DATA BANKS come into being servicing customers around the world on COMMERCIAL basis and through LONGTERM contract relations.
The Internet and the "World Wide Web" (www) rapidly change economic relations and human psychology. For example, the development of the socalled ecommerce (electronic retail trade in CONSUMER goods and services) and ebusiness (electronic trade between companies in INVESTMENT goods, also called B2B, from businesstobusiness) reduces radically the number of MIDDLEMEN (mostly, wholesale traders) and often makes possible DIRECT delivery contracts between the PRODUCER and the CONSUMER (user). In the U.S., INFORMATION TECHNOLOGY, including business on the Internet, is growing TWICE as fast as the overall economy, and is rapidly expanding to other regions of the GLOBAL ECONOMY.
All this looks like a boon. However, in the future a mighty GLOBAL COMMERCIAL (COMMERCEbased) CRISIS can and probably will arise – exactly because of masscollapses of MIDDLEMEN, i.e. of wholesale and even retail trading establishments, which will lose their raison d’etre (ground for existence) as a result of the newfangled DIRECT ties between PRODUCERS and CONSUMERS (USERS). Before the recent GLOBAL FINANCIAL CRISIS has begun and rapidly spread around the world, only few people have expected something like it, though the new sources of instability in the FINANCIAL SYSTEM have been for some time quite obvious.
* INTERNATIONALIZATION of the ECONOMIC POLICY is a special issue which we shall discuss at length later. Here, it is worthwhile only to stress that, besides the international economic policy of individual NATIONSTATES (on the MACROlevel) and NATIONAL FIRMS (on the MICROlevel), a NEW variety of political activity arises – that of "DIRECTLY INTERNATIONAL REGULATION", which is more and more felt in individual REGIONS and on GLOBAL (worldwide) scale.
On the MACROlevel, new economic policies and economic institutions (instruments) are created in individual REGIONS (as elements of emerging INTEGRATION SYSTEMS) and on a GLOBAL scale. We speak here of INTERNATIONAL ECONOMIC ORGANIZATIONS created WITHIN the framework of the UNO (like the United Nations Conference on Trade and Development UNCTAD) or OUTSIDE this global political structure (like the World Trade Organization WTO, or the International Monetary Fund IMF).
On the MICROlevel, the TNC representing quite NEW kind of business organization, i.e., that of "GLOBAL FIRM", are following their own economic policies, which rather OFTEN get into CONFLICT with national interests and national policies – both of the countries where their production (plant, industrial complex) is located (the socalled HOST COUNTRIES), and of those whose capital they mainly represent and where their own headquarters are situated (their HOME COUNTRIES).
Both the TNC and what we may call BINATIONAL COMPANIES (BNC), representing united capital of TWO or more firms from TWO different countries (like Royal DutchShell in the field of CRUDE OIL production and refining, like Unilever in the realm of CHEMICAL industry, like DunlopPirelli in the production of TIRES) become new "acting persons" in the WORLD ECONOMY and play their special INDEPENDENT PART in international economic (and even political) affairs.
TNC especially enjoy high AUTONOMY in matters of policymaking and are rather INDEPENDENT from "their" nationstates. It does NOT mean that these states do NOT assist "their" TNC (i.e., those representing national capital) both domestically and on wide international arena. Moreover, we can speak about certain COMPETITION between GOVERNMENT BODIES of the leading national states in assisting "their" (i.e., American, Japanese, British) TNC both in export effort and in investment projects abroad (please, remember energetic competition between the Ministry of Economy, Trade and Industry METI of Japan and the American Export Import Bank EIB)
The TNC and BNC (often summedup under the name "multinationals or MNC) represent new phenomenon of "GLOBAL FIRM" creating a kind of "magnetic field" into which SMALL and MEDIUMSIZE business enterprises in many countries are drawn. They are "mighty motors" in spreading OLIGOPOLY structures around the world and serve as COORDINATING CENTERS in creating DIRECTLY INTERNATIONAL PRODUCTION systems with their high EFFICIENCY and COMPETITIVENESS.
Manufacturing composite products for GLOBAL MARKETS, such GLOBAL FIRMS can organize production on a truly MASS scale, thus enjoying advantages of the ECONOMY OF SCALE (i.e., relatively LOW unit costs for their products).
Their production is highly DIVERSIFIED, they use the principle of cleverly SEGMENTATING their markets, their organizational structures are modern and efficient – through high grade of DECENTRALIZATION and COMMERCIAL nature of relations within their international production and marketing complexes (the socalled "quasitrade" relations).
* Among the strong influences the activity of TNC and the development of DIRECTLY INTERNATIONAL PRODUCTION exert on each individual NATIONAL ECONOMY as a whole (i.e., on the MACROlevel), we have also to mention two phenomena – INTERNATIONALIZATION of REPRODUCTION and INTERNATIONALIZATION of CAPITAL ACCUMULATION.
According to classic economic theory REPRODUCTION means continuous, uninterrupted process of PRODUCTION on the MACROscale, i.e., within the framework of NATIONAL ECONOMY as a whole.
Now, the situation changes. The BORDERS between individual NATIONSTATES become VAGUE (indistinct), the NATIONAL ECONOMIES become OPEN ECONOMIES. As such, they more and more draw into reproductive processes RESOURCES of other countries and, in their turn, produce GOODS (commodities) for INTERNATIONAL markets. The INTERNATIONAL MIGRATION OF CAPITAL acquires GLOBAL dimensions and gains paramount importance pushing the traditional FOREIGN TRADE (especially its COMMERCIAL variety) INTO BACKGROUND of economic life.
The processes of REPRODUCTION also take INTERNATIONAL character, in particular through the development of DIRECTLY INTERNATIONAL PRODUCTION systems. Such INTERNATIONAL REPRODUCTION often takes form of the socalled EXTENDED REPRODUCTION, i.e., proceeds on a GROWING SCALE. Thus, the CAPITAL ACCUMULATION (SAVING for INVESTMENT purposes) becomes INTERNATIONAL as well.
Especially clearly we can observe INTERNATIONALIZATION OF REPRODUCTION in individual REGIONS, i.e., mostly in relations between NEIGHBORING nationstates which ever more take the character of ECONOMIC INTEGRATION.
This new important phenomenon of the modern world economy we shall analyze in following Topics. Here, it is worthwhile to stress that at least in TWO major economic regions of the world in Europe (the area of the European Union – the EU) and in North America (the area of the NAFTA), REPRODUCTION and ACCUMULATION processes have been already taking place RATHER on REGIONAL than on exclusively NATIONAL scale.
* The INTERNATIONALIZATION of REPRODUCTION and emergence of GLOBAL COMPANIES (mostly in the form of TNC) create tendency toward growing ECONOMIC INTERDEPENDENCE between firms and nationstates as a whole.
It is on this ground that the doctrine of "ATLANTICISM", incorporated in the wellknown Organization of Economic Cooperation and Development (OECD) created in 1961, has grown.
The idea of " ECONOMIC INTERDEPENDENCE" is nourishing also the concept of "TRIPARTITEALITY". It concerns "special character" of relations in the "BIG TRIANGLE", formed by the "GREAT POWERS" of the THREE major industrial REGIONS of the modern world Europe, North America and AsiaPacific (Britain, Germany, France USA Japan).
This concept gave birth to some important INTERNATIONAL INSTITUTIONS as well, like the Tripartite Commission (created in 1973), or to the by far more famous GroupofSeven Summits (G7 Summits). Those are regular meetings of the highest representatives of the leading industrial nations (USA, Japan, United Kingdom, Germany, France, Italy and Canada) taking place at least once a year with the aim to discuss topical economic issues of global importance. Since 1997, however, this system of regular consultations of the G7 has been expanding so as to include new Russia thus more and more forming a GroupofEight (with G8 Summits).
In 2003, shortly after the end of the war in Iraq, French Prime Minister JeanPierre Raffarin invited Hu Jintao, newlyelected President of China, to take part in a G8 Summit meeting in Evian (France) – first time ever. It might have been the beginning of the transition to a new – G9 – summit formula.
However, under the impact of the GLOBAL CRISIS, the stress has been shifted from relatively NARROW negotiation structures to WIDER ones – in particular, to that of the GroupofTwenty (G20) which has first time gathered in Pittsburg (USA) in September 2009.
* The doctrine of the "ECONOMIC INTERDEPENDENCE" also plays its role in developing IDEOLOGY of the main REGIONAL political and economic BLOCS and MOVEMENTS:
# in Europe, it forms the background for the ideas of "PANEUROPEISM”,"EUROPEAN UNIFICATION", "UNITED EUROPE" and “EUROLAND” (incorporated in the European Union of today – the subject discussed in Topic 7) and corresponding FEDERALIST policies;
# in America, it is connected with the concepts of "PANAMERICANISM", with the "Monroe Doctrine" (according to which the whole Western Hemisphere is still regarded by U.S. politicians as the sphere of American interests), with the idea of the North American Free Trade Agreement NAFTA;
# in Southeast Asia, it brings about and stimulates such SUBREGIONAL political and economic arrangements as the famous Association of South East Asian Nations (ASEAN) and the East Asia Economic Caucus (EAEC), which now more often figures under the name ASEAN + 3 (those 3 being Japan, China and Korea) and ASEAN + 6 (including also India, Australia and New Zealand);
# and in the vast AsiaPacific region (or superregion), in a paradox way, it gives rise to something like a radically modernized version of the notorious prewar Japanese idea of the socalled "Greater East Asian Zone of CoProsperity" (the illfamed ideological slogan widely used by Japanese militarists during the World War II).
Nowadays, the idea of PANPACIFIC cooperation has been revived within the framework of the Asia Pacific Economic Cooperation forum APEC, as well as in connection with even more farreaching schemes aimed at establishing a giant "PACIFIC COMMUNITY" in the 21st century (we shall discuss these issues in Topic 9).
Thus, GLOBAL COMPETITION on the WORLD MARKETS is accompanied by strong CENTRIPETAL (uniting) TENDENCIES within particular REGIONS of the WORLD ECONOMY and between them. So, in the future APEC must contribute to enhancing economic ties between Western and Eastern Pacific, or Asia and America, while the (so far quite vague) plans of a Transatlantic Free Trade Area TAFTA are aimed at facilitating further cooperation between Europe and America.
* At the same time, WORLD ECONOMY becomes a field for mighty struggle between the tendency toward LIBERALIZATION of international TRADE in goods and services and INVESTMENT of capital, on the one hand, and the tendency to the socalled PROTECTIONISM in the foreign policy of INDIVIDUAL STATES and their GROUPS, on the other hand.
It is well known that the TRADE PROTECTIONISM is aimed at creating SPECIAL FAVORABLE CONDITIONS for economic development and local capital within certain NATIONAL ECONOMIES and/or ECONOMIC REGIONS, thus achieving egoistic goals at the expense of "aliens" ("outsiders").
Topic 6. BILATERALISM (REGIONALISM) AND MULTILATERALISM
(GLOBALISM) IN THE MODERN WORLD
What we have discussed at the end of the previous lecture (the ideas of "INTERDEPENDENCE", "TRIPARTITEALITY", "ATLANTICISM", "PANEUROPEISM" or "PANAMERICANISM") actually represent one of the major issues of modern INTERNATIONAL POLITICS – that of the relationship between the TWO approaches to international affairs (including ECONOMIC sphere):
# the BILATERAL approach (i.e., "BILATERALISM") and
# the MULTILATERAL approach (i.e., "MULTILATERALISM").
* What the term "BILATERALISM" means? Originally, it was intended to describe relations between TWO particular countries (for example, between Germany and France, Japan and China, America and India, or Kenya and Australia). We have intentionally included two PAIRS of NEIGHBORING countries, because now this term is often used in its broad interpretation, i.e., in REGIONAL context to express some features of RELATIONSHIP within a certain ECONOMIC REGION (or SUBREGION) of the WORLD ECONOMY, like Western Europe, North America or South East Asia.
Of course, there remains some DIFFERENCE between BILATERALISM in its CLASSIC sense and REGIONALISM as a wider term. The relationship between, let us say, United Kingdom and China can NOT be described otherwise as BILATERAL. However, in regard to countries of the SAME region, BOTH terms can be used. For example, we can treat the economic relations between France and Italy as "BILATERAL" and/or "REGIONAL" (in BOTH cases, meaning "European").
Accordingly, the relationship between MORE than TWO countries of the SAME region (for example, between the USA, Canada and Mexico) often are, as a matter of practice, named NOT only "REGIONAL", but also "BILATERAL" to express the idea that they are DIFFERENT from truly "MULTILATERAL" relations.
* This latter term "MULTILATERAL" usually describes relations (negotiations, arrangements) between several countries situated in DIFFERENT economic regions. It also describes processes, which are observed on the WORLDWIDE scale in contrast to REGIONAL processes, which are often described as "BILATERAL".
The same applies to INTERNATIONAL ECONOMIC ORGANIZATIONS. Usually, such organizations created on REGIONAL basis are called “REGIONAL” and/or "BILATERAL", while organizations including members from DIFFERENT regions (i.e., countries of DIFFERENT continents) are named "MULTILATERAL".
Thus, the Association of South East Asian Nations (ASEAN), for example, expresses the spirit of "BILATERALISM" (because it has REGIONAL basis), while the WORLD TRADE ORGANIZATION (WTO) is typically "MULTILATERAL" (because it includes more than 150 nations all around the world).
* So, DIFFERENT terms are used to describe DIFFERENT situations and processes in relations between nations (countries). Those developing on a REGIONAL basis are regarded as "REGIONAL" or "BILATERAL", and those developing on WORLDWIDE and INTERREGIONAL basis are treated as "MULTILATERAL".
* Why has such a confusing situation in usage of terminology arisen? Exactly because truly "BILATERAL" relations (between TWO particular countries) play in today's economic life only a relatively MINOR role. At the same time, REGIONAL and WORLDWIDE relations (and economic processes) are moved to the FOREGROUND of public attention. It is with the aim to DIVIDE these latter from each other that the two opposite terms – the "BILATERALISM" (the "BILATERAL" approach) and the "MULTILATERALISM" (the "MULTILATERAL" approach) are used.
* And why exactly REGIONAL and WORLDWIDE phenomena (processes) have found themselves in the middle of public attention? Because BOTH of them represent the MAJOR tendency in economic life – its INTERNATIONALIZATION.
The matter is that on a REGIONAL scale and on a WORLDWIDE (or GLOBAL) scale the MANIFESTATIONS of INTERNATIONALIZATION are quite different, i.e., the INTERNATIONALIZATION itself can take different FORMS in different situations and circumstances. Let us look at these TWO MAJOR FORMS of INTERNATIONALIZATION.
# For ONE of these TWO forms we shall keep the wellknown traditional name "INTERNATIONALIZATION" and together with it also use a NEW term – "GLOBALIZATION" having in mind the processes on the WORLDWIDE scale (i.e., OVERALL internationalization of TRADE, CAPITAL, PRODUCTION, etc. – without regard to REGIONAL processes). Such "GLOBALIZATION" has become a COMMON TREND in modern WORLD ECONOMY (GLOBAL SYSTEM) and forms the BACKGROUND for ALL OTHER developments on international arena.
# As for certain economic REGIONS (or SUBREGIONS) of the world – like Europe and Western Europe, North America, East Asia and the whole of Pacific Basin or, let us say, West Africa, or Latin America, – there the INTERNATIONALIZATION processes take their specific FORM – that of ECONOMIC INTEGRATION. So we shall call these particular REGIONAL processes and systems "INTEGRATION".
If we now turn to the matters of INTERNATIONAL POLICY or to INTERNATIONAL ECONOMIC RELATIONS, than we can associate the "GLOBALIZATION" of economic life (i.e., "INTERNATIONALIZATION" in its broad sense, on a WORLDWIDE scale) with the aforementioned concept of "MULTILATERALISM", and the economic "INTEGRATION" on REGIONAL basis with "BILATERALISM" or "REGIONALISM".
* However, first of all we must define "INTEGRATION" (or "INTERNATIONAL ECONOMIC INTEGRATION"), and explain WHAT exactly makes it so SPECIFIC, visibly different from "GLOBALIZATION" ("INTERNATIONALIZATION") on the WORLDWIDE scale.
Let us notice that for the modern world POLICENTRIC structures are generally typical. This POLICENTRISM very clearly shows itself also in the processes of INTERNATIONALIZATION of trade, capital and production which are developing very UNEVENLY in different PARTS (or "subsystems") of the WORLD ECONOMY. In the overall picture of the development of international economic activity on the MICROlevel (and on the MESOlevel where COOPERATION between PRODUCERS is taking place), we find several ECONOMIC REGIONS where economic relations between NEIGHBORING countries are spreading with especially HIGH SPEED.
In the INDUSTRIAL part of the world, among such ECONOMIC REGIONS (sometimes, rather SUBREGIONS because of relatively small size) we may name Western Europe and North America. Also with some reservations Pacific Basin (or "Asia Pacific"), with Japan and the U.S. as the two major centers of economic activity, is regarded as ECONOMIC REGION. However, because of its sheer size, it seems to be more appropriate to call it a SUPERREGION, where a complex INTERNATIONAL SYSTEM of economic cooperation is being gradually formed.
In such ECONOMIC REGIONS, processes of INTERNATIONALIZATION are developing so energetically that a virtual QUANTUM LEAP takes place. It means that the very CHARACTER of interaction between neighboring countries CHANGES taking NEW FEATURES. And the most important of such NEW FEATURES is exactly the emergence of DIRECTLY INTERNATIONAL mode of REPRODUCTION typical to them.
So, on the background of UNIVERSAL processes of INTERNATIONALIZATION (which we just named GLOBALIZATION), in particular REGIONS this tendency is expressed MORE STRONGLY, thus taking a HIGHER and very SPECIFIC form of the "INTERNATIONAL (mostly REGIONAL) ECONOMIC INTEGRATION".
# On the MICRO and MESOlevel, such INTEGRATION (with "REGIONALISM" as major orientation of economic policy of individual FIRMS) is developing spontaneously, thus forming a solid tissue of intraregional ECONOMIC RELATIONS which service the emerging intraregional REPRODUCTION PROCESSES.
# On the MACROlevel, the STATES with their FOREIGN ECONOMIC POLICIES join their efforts to create LEGISLATIVE and INSTITUTIONAL FRAMEWORK for the development of REGIONAL ECONOMIC SYSTEM. They sign special REGIONAL agreements aimed at securing favorable conditions for the INTRAREGIONAL economic TURNOVER – trade, migration of capital and labor, financial payments, etc.
The just mentioned REGIONAL ECONOMIC SYSTEM (or "SUPERSTRUCTURE") taking different forms incorporates the tendency to REGIONAL ECONOMIC INTEGRATION and can be called the "INTEGRATION SYSTEM".
* We have to understand a certain difference between the terms "INTEGRATION SYSTEM" and "INTEGRATION PROCESSES". The latter ("processes") are developing in many (practically, in ALL) major regions of the world. As for "systems", they can be observed NOT everywhere. Usually, for their emergence a very HIGH GRADE in development of "integration processes" should be reached BEFOREHAND, and a certain POLICY ARRANGEMENT between STATES of the region in question should be created by their GOVERNMENTS.
The formation of the EUROPEAN COMMUNITY EC (now the EUROPEAN UNION EU) can serve here as a classical example. It took place way back in the late 1950s through the signing of the Treaty of Rome by SIX European countries (Germany, France, Italy, Belgium, Netherlands and Luxembourg). In contrast to this, we can mention Pacific Basin (Asia Pacific region) where INTEGRATION PROCESSES are evident, but no INTEGRATION SYSTEM has taken definite shape yet.
As of late, another clear example of mighty INTEGRATION PROCESSES, mostly through PRODUCTION COOPERATION and OUTSOURCING on a sector basis (carmaking, electronics, electrical appliances, etc.), can be found between such powerful but socially and geographically very different countries as the United States of America, on the one side, and China, on the other side. At least, a system of COMMON METABOLISM (something like a common bloodstream) in the aforementioned INDUSTRIAL SECTORS (first of all – in CARMAKING) has been emerging, a NEW PHENOMENON which I have named “TWINNING” («сиамизация» in Russian).
* We have also to understand the difference between the two other terms "NEGATIVE INTEGRATION" and "POSITIVE INTEGRATION".
#"NEGATIVE" integration means the SUM of JOINT ACTIONS by a group of states aimed at DESTROYING OBSTACLES on the way to expanded economic cooperation within the region. As example we can name gradual (within 10 years, from 1958 to 1968) introduction of conditions for FREE MOVEMENT of goods, services, capital and labor between the first "European SIX" which have signed the Treaty of Rome.
# The essence of "POSITIVE" integration can also be best understood on the European example. Moves, like creating the European Commission (or simply Commission) to serve as COORDINATING CENTRE in policymaking, like working out of the COMMON AGRICULTURAL POLICY (CAP), or introducing of the EUROPEAN MONETARY SYSTEM (EMS) some years later, – all these developments signified NOT destruction, but active CREATION of new international and supranational INSTRUMENTS of ECONOMIC POLICY by the member states of the EC (EU).
So, "NEGATIVE INTEGRATION" destroys obstacles holding back the development of intraregional economic activities, and "POSITIVE INTEGRATION" creates new regulative instruments (institutions) of economic policy.
By their nature, such instruments can be called "INTERnational" (when the policy decisions are being taken together by the member states as a result of negotiations between their representatives), or "SUPRAnational" (when decisions are met by special SUPRAnational organs (bodies) created with this very aim and granted their own JURISDICTION by the member states – like the European Commission).
* To properly understand the essence of "INTEGRATION", we also need learning the difference between its major ORGANIZATIONAL FORMS. To make things easier, we shall discuss only THREE of them going from the SIMPLER (or LOWER) forms of INTEGRATION ARRANGEMENTS to the MORE COMPLEX (or HIGHER) forms.
# FREE TRADE AREA (FTA) an agreement to LIBERALIZE trade in GOODS (and often also in SERVICES) within certain geographical borders – by eliminating CUSTOMS TARIFFS (import duties) in the intraarea turnover (i.e., in MUTUAL TRADE of the member states). As for the CUSTOMS SYSTEMS (tariffs, rules) concerning trade of the member states with the OUTSIDE WORLD (with the socalled "THIRD COUNTRIES"), they stay NATIONAL, i.e., are established by each member UNILATERALLY and can be changed by their independent decisions only.
Arrangements of this kind can be found in North America (the famous NAFTA), in Latin America, in South East Asia, in some other regions and subregions.
# CUSTOMS UNION (or COMMON MARKET) the CUSTOMS TARIFFS in the intraunion (intraarea) turnover are also ELIMINATED (the MUTUAL trade of the member states – LIBERALIZED), but the arrangements go farther – as to include the CREATION of a COMMON CUSTOMS SYSTEM (introduction of COMMON CUSTOMS TARIFFS) on the border of the union (community). So, as a classical example, the European Union (EU) represents an ASSOCIATION of nations with FREE TRADE in GOODS and SERVICES among its members and a COMMON EXTERNAL TARIFF (features of a typical CUSTOMS UNION), as well as with FREE MOBILITY of production factors, i.e., of CAPITAL and LABOR (exactly this addition makes it a "COMMON MARKET"). When, as the next stage, major ECONOMIC POLICIES of individual member states are being harmonized then such association becomes an ECONOMIC UNION.
# ECONOMIC UNION precisely represents the third, and so far the HIGHEST form of regional economic association (community, union). Now, with the introduction of many NEW common instruments of ECONOMIC POLICY and the UNIFICATION of ECONOMIC CONDITIONS within integrated parts of Europe, the former European Community (EC) can be, and as a matter of fact is, called EU European Union (now in the process of becoming an "EMU" – "ECONOMIC AND MONETARY UNION" through the introduction of a single European currency – the euro).
Of course, the ECONOMIC integration usually goes hand in hand with POLITICAL rapprochement (growing cooperation) of countries within the same REGIONAL borders. In the last two decades, the EC (EU) has developed many purely POLITICAL institutions and instruments, which impart to it NEW QUALITY – that of a regional POLITICAL UNION. We shall NOT, however, analyze here this (POLITICAL) side – important in itself – of EUROPEAN ECONOMIC INTEGRATION.
Let it be noticed that all remaining topics in current semester will be devoted exactly to issues of REGIONAL ECONOMIC INTEGRATION, as well as to other forms of REGIONAL economic and political COOPERATION. So, here our modest aim was only to outline the THEORETICAL BACKGROUND on which individual INTEGRATION PROCESSES and SYSTEMS should be analyzed (see Table 1.6.1).
* Now let us switch to MULTILATERALISM.
It has so many MANIFESTATIONS in the modern world that it would be impossible to regard all of them. Of special importance is, however, the fact that practically ALL international ECONOMIC ORGANIZATIONS (with permanent character of activities), as well as different MULTILATERAL FORUMS (gathering only once or episodically), concentrate their attention on TWO major international PROBLEMS:
# on further LIBERALIZATION of the international economic turnover (first of all on the LIBERALIZATION of trade and investment),
# on ASSISTING national and regional ECONOMIC DEVELOPMENT in different groups of countries around the world (i.e., on the socalled "DEVELOPMENT AID (or ASSISTANCE)”.
Let us now name some major MULTILATERAL ORGANIZATIONS of economic nature and outline main fields of their activity.
* We shall start with ORGANS (bodies) created on the basis and WITHIN the overall political structure of the United Nations Organization (UNO or UN):
The United Nations Conference on Trade and Development (UNCTAD) is a permanent organ of the UNO instituted in 1964 to promote TRADE, especially with a view to accelerating ECONOMIC DEVELOPMENT. The Conference meets every FOUR years. UNCTAD main functions include the promotion of TRADE between countries in different stages of development and with different economic systems, initiation of action for negotiating TRADE AGREEMENTS, and formulating international TRADE POLICIES.
The United Nations Industrial Development Organization (UNIDO), created in 1967, aims to assist in the INDUSTRIALIZATION of developing countries by coordinating efforts of other UN organizations devoted to this end. It helps to formulate industrial development POLICIES and PROGRAMS by providing advisers and other assistance, mostly in terms of INFORMATION, EDUCATION, and RESEARCH.
The United Nations Capital Development Fund (UNCDF) is in operation from 1974. It aids developing countries by means of GRANTS and LOANS. Available to any member states of the UN system, UNCDF provides rapid assistance. However, its resources are primary used for GRANTS to the 49 leastdeveloped countries. Assistance applies to agriculture, agroindustry, drinking water supply, health and nutrition, lowincome housing, roads, etc.
The United Nations Development Program (UNDP), established in 1965, aims to build more productive societies and economies in lowincome nations (the "leastdeveloped countries" mentioned above) by helping them develop their NATURAL and HUMAN RESOURCES.
The International Fund for Agricultural Development (IFAD), created in 1976, is an agency for supporting FOOD PRODUCTION in poor communities. According to rules of the fund, the "industrialized countries" (Category 1) and "petroleumexporting developing countries" (Category 2) provide revenue (money) for financing, so that the "recipient developing countries" (Category 3) can use it for agricultural development purposes.
The Food and Agricultural Organization (FAO) is the oldest permanent specialized agency of the United Nations, established after World War II with the objective of eliminating hunger and improving nutrition. It seeks TO COORDINATE the efforts of governments and technical agencies in programs for developing AGRICULTURE, FORESTRY, and FISHERIES.
The International Labor Organization (ILO) is also a specialized agency created by the United Nations whose aim is to facilitate the improvement of LABOR CONDITIONS (hired work) and LIVING STANDARDS throughout the world, etc.
* However, MULTILATERAL ORGANIZATIONS established OUTSIDE political structure of the United Nations Organization are generally MORE efficient in working out economic policies and/or have command over MORE and BIGGER financial funds supplied by the member states. Let us name some of them too:
The Organization for Economic Cooperation and Development (OECD) was established in 1961 by 18 European nations, the USA, and Canada. Its aim was to replace the former Organization for European Economic Cooperation (OEEC, 1948), which played an important role in realization of the Marshall Plan after the World War II. Now, the OECD includes over 30 mostdeveloped and richest nations of the world, with such "newcomers" as the Czech Republic from among the "postsocialist" countries and the Republic of Korea (ROK) from among the NIC.
However, this "club of the rich" is mainly acting only as an advisory body – because of the principle of UNANIMITY on which it is based. Still, it is a very influential organization. One of its fundamental purposes is to achieve the highest possible ECONOMIC GROWTH and EMPLOYMENT in member countries. At the same time, the OECD emphasizes maintaining FINANCIAL STABILITY. The organization attempts to reach this goal by LIBERALIZING trade and investment between industrial countries and on a worldwide scale. A further major goal of the OECD is the COORDINATION of international ECONOMIC AID.
Yet, in following its policies, OECD often gets under critical fire of the DEVELOPING COUNTRIES which do NOT want INVESTMENT LIBERALIZATION and some other proposed measures and institutions to be imposed upon them. Let us note that during the GLOBAL FINANCIAL AND ECONOMIC CRISIS the role of the OECD was a very MINOR one – at the best.
The World Trade Organization (WTO) was introduced from January 1, 1995 as the successor of the General Agreement on Tariffs and Trade (GATT). When established in 1948, the GATT united 50 countries, while at its last session in April 1994 in Morocco, more than 120 member states took part. Nowadays, the WTO encompasses over 150 countries, including China, Taiwan and Russia which since 2013 does not save efforts to become its fullsize member (the decision about China and Taiwan membership went through as early as in 2001).
The GATT agreement (as document) represents an INTEGRATED SET of international (mostly BILATERAL) trade arrangements aimed at the abolition of QUOTAS (quantitative restrictions to trade) and the reduction of IMPORT DUTIES (customs tariffs) among the contracting nations (now, members of the WTO).
However, the GATT always was MORE than an agreement. It served as a regular FORUM for conducting BILATERAL and MULTILATERAL trade negotiations between its member states and working out GLOBAL ARRANGEMENTS on this basis. Negotiations took place in prolonged "ROUNDS" which we shall discuss later today.
As an agreement, GATT set forth general rules that are, in effect, a CODE for commercial policy. They provide for unconditional MOSTFAVOREDNATION treatment of trade partners (the famous MFN principle). The MFN guarantees ALL members of the WTO the extension of ANY tariff concessions granted by one particular country to another, including concessions to nonWTO countries.
The agreement also foresees the elimination of QUOTAS and other quantitative trade restrictions, the workingout of UNIFORM customs regulations, and the obligation of EACH contracting nation to NEGOTIATE on tariff cuts upon the request of another. An ESCAPE CLAUSE, however, allows contracting countries to alter agreements, if their domestic producers suffer "excessive losses" as a result of trade concessions.
According to WTO (GATT) arrangements, countries that are members of a CUSTOMS UNION or a FREE TRADE AREA are permitted to grant each other PREFERENTIAL tariff rates, or to eliminate TARIFFS (CUSTOMS DUTIES) in mutual trade completely. As for the EXTERNAL TARIFFS of such trading GROUPINGS (used in trade with the "third countries"), they may NOT be higher than the AVERAGE of all the tariffs of those countries PRIOR to the formation of the customs unions (free trade area). The introduction of such UNIONS, however, must be approved by WTO, i.e., they must receive official recognition.
In 1965, a historic principle has been established: that DEVELOPING countries should NOT be expected to offer RECIPROCITY (i.e., counterconcessions) in negotiations with DEVELOPED (INDUSTRIAL) countries. The introduction of the socalled "NONRECIPROCITY" principle contributed to creating more favorable atmosphere for the socalled "NORTHSOUTH" dialogue.
The International Monetary Fund (IMF) – originally acted as specialized agency of the UNO (however, now it is more independent from UNO political structure). It was founded at the Bretton Woods Conference in 1944 to secure international MONETARY COOPERATION, stabilize EXCHANGE RATES, and expand international LIQUIDITY (convertibility to cash).
Operation FUNDS (money) are subscribed by member governments according to the level of their NATIONAL INCOME and size of their international RESERVE (currency) HOLDINGS. Country with temporary difficulties in its international balance of payments may purchase from the IMF, with its own national currency, foreign reserve (mostly, US dollars) to meet its international obligations.
First introduced in 1969, the socalled "Special Drawing Rights" (SDR) permanently expanded the SUPPLY of INTERNATIONAL LIQUIDITY (in addition to dollar and pound serving as the "key", or "reserve" currencies). Now, the SDRmechanism is also being used to assist countries going through financial troubles.
When international FINANCIAL CRISIS arises, the IMF can pool together really big "rescue packages" (amounts of dollars) and lend them to the troubled countries, usually on condition that they follow certain guidelines in their financial and economic policies. So it was with Mexico in 1994. So it was with Asia since the autumn of 1997, when a "financial meltdown" hit Indonesia, Thailand, and Korea representing a serious threat to the REGION and the WORLD (remember "early loan program" of the IMF and its flexible lending policy during the Asian crisis).So it is with the modern GLOBAL CRISIS in fighting which the IMF has been playing a substantial role and is expected to introduce major CHANGES in its mechanism to facilitate better CONTROL over CAPITAL MIGRATION of different kinds.
The International Bank for Reconstruction and Development (IBRD, often called the World Bank) was created in 1946. It is designed to finance productive PROJECTS that assist economic development around the world. Quite naturally, the U.S. and Japan serve as the biggest sources of FUNDS for such activities.
Loans are usually made to governments, or to private enterprises with their government's guarantee, for SPECIFIC PROJECTS when private capital is NOT available on reasonable terms. The bank lends only for the cost of imported material, equipment, and services obtained from abroad.
The International Development Association (IDA) is an affiliated organization of the World Bank (IBRD) that lends to the world's poorest countries at generous conditions, such as ZERO RATE of interest and LENGTHY repayment time. Many IDA loans are NOT expected to be repaid.
The International Finance Corporation (IFC) is another arm of the World Bank. It also makes loans and invests in private companies in developing countries.
Before the end of 1999, one more international financial forum – the socalled Group of 20 (G20) held its first meeting in Berlin. Along with G7 finance ministers and central bank governors, the G20 brings together representatives of 12 of the "emerging economies" including Russia, China, South Korea, India, Indonesia, and Brazil. In 2010, the G20 Summit in Seoul has been devoted to the issues of global financial crisis, to how to avoid “currency wars” and, in particular, how to make China give up its too low rate of exchange of the yuan.
* There also exist very peculiar INTERNATIONAL ORGANIZATIONS, which are created and FINANCED on a wide international (MULTILATERAL) basis, but are aimed at ACTING within certain ECONOMIC REGIONS (i.e., on BILATERAL ground).
Here we may name the UNITED NATIONS ECONOMIC COMMISSIONS:
# for Asia and Far East – ECAFE (UN),
# for Africa – ECAf (UN),
# for Latin America – ECLA (UN),
# for Europe – ECE (UN).
Correspondingly, there are REGIONAL DEVELOPMENT BANKS, which are funded by large capital commitments (subscriptions) and loans from rich countries, such as the United States, Japan, and Switzerland. These funds are then lent at a low rate of interest and favorable repayment conditions to needy countries.
The biggest of the regional development banks is the INTERAMERICAN DEVELOPMENT BANK (IADB), funded primary by countries of the Western Hemisphere and providing loans to poor countries of Latin America.
The ASIAN DEVELOPMENT BANK (ADB), based in the Philippines, was set up in 1966 to foster economic growth in Asia and the Pacific region (mostly in the agriculture). It is worthwhile to notice that, together with America and Japan, over a dozen of EUcountries make considerable contributions to the ADB regarding it as a useful tool for enhancing EuropeAsia ties.
The AFRICAN DEVELOPMENT BANK (AfDB), the smallest of such banks, is based in Abijan (Ivory Coast). Its loans are used mainly for public utilities, transportation, and agricultural projects in the socalled SubSaharan Africa.
Following the decision of Eastern (Middle) European countries to enter the market economy, the EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) was set up in London in 1990 to provide massive amounts of DEVELOPMENT AID to countries such as Poland, Hungary, Czech Republic, Slovakia, Estonia, Latvia, and Lithuania (and for other new nationstates which are emerging after the disintegration of the Soviet Union)
* Now, to illustrate the POTENTIAL of the major MULTILATERAL ORGANIZATIONS, we shall touch upon the GATT (WTO) history and outline some practical results achieved by this organization in the course of the last THREE rounds of MULTILATERAL trade negotiations (all in all, since the 1940s, EIGHT such rounds have taken place).
* "KENNEDY ROUND" (196567), named after the American president, who put forward the concept of the "Atlantic partnership".
The main positive result of the Kennedy Round were very substantial reductions of CUSTOMS TARIFFS (import duties) granted by main trading partners to each other. These concessions concerned, first of all, INDUSTRIAL PRODUCTS (average reduction of duties by 35%, to be implemented over a fiveyear period). They represented the first big step in fighting TARIFF PROTECTIONISM of major DEVELOPED COUNTRIES and in liberalizing their mutual TRADE turnover.
In general terms, they also represented the first MAJOR BLOW to the TARIFF PROTECTIONISM as such, and especially – to the PROTECTIONIST INDUSTRIAL POLICIES flourishing in Europe and North America.
For the FIRST TIME in the GATT history, the negotiations also touched upon the issues of the so called NONTARIFF PROTECTIONISM. The main result in this field was the adoption of a uniform ANTIDUMPING CODE.
In relations between the "INDUSTRIAL NORTH" and the "AGRICULTURAL SOUTH", the principle of NONRECIPROCITY of concessions has been introduced.
The U.S. representatives also insisted on putting on the agenda the issue of the AGRICULTURAL PROTECTIONISM of the then European Community. The results of discussion were, however, very modest (in the end, both sides – i.e., Europe and America – managed to keep their agricultural systems unchanged).
* "TOKYO ROUND" (197379). It brought new reductions of TARIFFS (mostly in the field of INDUSTRIAL PRODUCTS), but its major result was the introduction of several "CODES of behavior” – concerning the GOVERNMENT PROCUREMENT practices, use of TECHNICAL STANDARDS, SUBSIDIES for national exporters, etc.
The most important of them the "CODE ON SUBSIDIES AND COUNTERVAILING DUTIES" had TWO main features:
# it listed a number of unacceptable SUBSIDY practices, and
# introduced a requirement that FORMAL PROCEDURES should be followed before the imposition of COUNTERVAILING DUTIES (i.e., additional prohibitive tariffs) on imports subsidized by foreign nations.
However, the Code has NOT been signed by ALL of the members, and the signing nations agreed to follow the prescribed rules before applying COUNTERVAILING DUTIES only to the exports of other signatories. Thus, while the code represented PROGRESS in dealing with new topic of nontariff barriers, it also represented a DEPARTURE from the mostfavorednation (MNF) principle.
In economic history, the Tokyo Round is regarded as a MAJOR STEP in fighting the NONTARIFF PROTECTIONISM.
* "URUGUAY ROUND" (198794) opened in PuntadelEsta at the end of 1986. It was the most prolonged and heavygoing, but maybe also the most important of the GATT negotiations campaign. At the signing ceremony in Marrakech (Morocco), it was praised as "the world's biggest ever trade accord to smash barriers to exports and boost global prosperity".
The main new features of this round of the GATT negotiations can be summed up as follows:
# tariffs on AGRICULTURAL products are being substantially REDUCED,
# for the FIRST TIME in history, the LIBERALIZATION of turnover has touched upon the field of SERVICES,
# the FIRST measures ever are being applied to the securing of INTELLECTUAL PROPERTY RIGHTS,
# the GATT itself had to be expanded and reorganized as the WORLD TRADE ORGANIZATION (WTO), with international status equal to the WORLD BANK and the INTERNATIONAL MONETARY FUND (IMF).
During the last several years and up to now, all these arrangements are being implemented, albeit in the same “heavygoing" way which characterized Uruguay Round from its very beginning.
* The World Trade Organization (WTO) became a reality as from January 1, 1995. Since then, several ministerial conferences (sessions) of the WTO have taken place.
The FIRST conference of the WTO gathered in Singapore in December 1996. There, in particular, an agreement to assist the world's 48 POOREST COUNTRIES has been reached – including an ACTION PLAN to boost TRADE with them; according to it, the LEASTDEVELOPED COUNTRIES should be granted DUTYFREE ACCESS to markets of ALL developed countries and some of MORE ADVANCED developing economies.
* According to the expectations at that time, a NEW ROUND of multilateral trade negotiations should have begun by the year 2000. However, it actually did NOT happen.
Especially, things have gone wrong after the scandal failure of the SECOND conference of the WTO held in Seattle (U.S.) for four days in NovemberDecember 1999.
Some important organizational questions concerning the then expected "Millennium Round" of the WTO negotiations have been agreed upon beforehand (for example, that the round should take NOT MORE than THREE years to be concluded) but NOT the round's AGENDA which created major tensions of different kind: between the U.S. and Europe, between the U.S. and Japan, between RICH and POOR nations, etc.
* Social clashes in Seattle in December 1999 manifested the true beginning of the militant ANTIGLOBALIZATION movement in the modern world headed by ecological and other NONGOVERNMENT ORGANIZATIONS. However, the terrorist attack against America on September 11, 2001 and the following U.S.headed wars in Afghanistan (against Taliban and alQaeda forces) and in Iraq have brought worldwide deep changes of their own, including generally more moderate public attitudes towards MULTILATERAL INITIATIVES and further TRADE LIBERALIZATION.
* In November 2001, at the THIRD meeting in Doha (Qatar) ministers from 142 member nation of the WTO adopted a document – dubbed the Doha Development Agenda – which provided ground for a new, originally THREEYEARS long ROUND of multilateral TRADE NEGOTIATIONS (the infamous “Doha Round”).
It looks like the U.S. has been fully resolved to use the new round to put an end to European AGRARIAN PROTECTIONISM, and first of all – to EU practice of heavily SUBSIDIZING the local agriculture. Earlier, the deadlock in Seattle was created exactly by the lack of compromise regarding FARM EXPORT SUBSIDIES. While America (together with Australia and other members of an alliance of AGRICULTURAL EXPORTING countries known as Cairns Group) insisted that all forms of such agricultural export support should be "scrapped" completely, Europe was willing to discuss only their "reduction". As for Japan, it insisted on the necessity to keep in mind the socalled "MULTIFUNCTIONALITY" of AGRICULTURE while discussing issues of TRADE LIBERALIZATION.
Some issues have been pushed by INDUSTRIAL nations, but strongly opposed by DEVELOPING countries. Among them we can name such topics as working out international LABOR and ENVIRONMENTAL STANDARDS. Many in Asia, Africa and Latin America believe that any decisions regarding these issues would be directed against them. For example, should the WTO accept UNIFORM STANDARDS of labor relations it would turn against poor countries (which with their extremely CHEAP LABOR most probably could NOT meet such STANDARDS).
* In September 2003, ministers from 146 countries gathered again in Cancun (Mexico) to make a midterm review of the Doha Round proceedings. However, the Cancun meeting ended in a failure to reach understanding both concerning the TIME framework for the negotiations (i.e., when exactly the round should end) as well as their final AGENDA. The collapse of talks in Cancun resulted from the crying lack of understanding between the DEVELOPING COUNTRIES headed by what has received the name of the Group 21, on the one side, and the RICH INDUSTRIAL NATIONS headed by the U.S. and the EU, on the other side. The main DISPUTE which led to a DEADLOCK has been connected with the question of FARM SUBSIDIES still used by the rich countries to the tune of $300 billion a year.
Generally, it was expected that after such misfortune in MULTILATERAL negotiations governments would switch their attention to BILATERAL and REGIONAL deals (mostly of the FTA type) and away from the WTO initiatives, and exactly that happened in the months following the Cancun disaster.
* The next session of the WTO gathered in Hong Kong more than two years later – in December 2005, when the deadline for the Doha Round has been overstepped by almost a year. However, this long expected tour of negotiations did not bring final result as well. The RICH countries opened the way to an eventual COMPROMISE by having agreed to CUT farm trade export SUBSIDIES in eight years and to provide special BREAKS for the poorest nations.
And since a GLOBAL FINANCIAL CRISIS has begun in 2008, any hopes for a near successful outcome of the current round of multilateral trade negotiations evaporated completely.
* Now, to finish with the analysis of the BILATERAL and MULTILATERAL approaches to world politics and international economic relations, we may notice that ECONOMIC POLICIES of EVERY modern state are undergoing deep CHANGES too.
> Its FOREIGN ECONOMIC COMPONENT grows in importance. On the overall background of LIBERALIZATION of international transactions, traces of PROTECTIONISM still remain. The STATES try to control their IMPORTS, so as to restrict deliveries of foreign goods to their home markets. They render assistance to national EXPORTING FIRMS and INVESTORS abroad. They are involved into various international NEGOTIATIONS and take part in the activities of international ORGANIZATIONS.
> The sphere of predominantly UNILATERAL (independent) actions, however, is rapidly shrinking. The new situation asks for MORE consideration toward foreign partners. Ever MORE issues are becoming subject to international NEGOTIATIONS and CONSULTATIONS. The United States and some other countries which are inclined to use UNILATERAL measures against their partners instead of going through process of negotiations are being criticized.
> Such negotiations can be BILATERAL (on twopartite or regional basis). Very often they serve to prepare new steps in REGIONAL ECONOMIC INTEGRATION. They can also contribute to establishing a kind of "special relationship" with a certain partner OUTSIDE the regional borders (like "special relations" between the U.S. and the United Kingdom, or between the U.S. and Israel).
Sometimes BILATERAL NEGOTIATIONS take prolonged and rather regular character, like the SinoAmerican or AmericanJapanese trade dialogues. It is because economic issues worrying both parties are often complex and longterm in nature (like the American TRADE DEFICIT). About the place which BILATERAL approach to negotiations and regional FTA arrangements takes in Japanese trading practice we shall speak in Topics 9 and 10.
> As we have seen, international contacts and arrangements of a given country can also be (and, very often, are) MULTILATERAL – through membership in INTERNATIONAL ORGANIZATIONS, through participation in different CONFERENCES, FORUMS, etc.
Nowadays, with the existence of WTO, some DISPUTES between individual TRADE PARTNERS (countries) are being negotiated BILATERALLY, but in the framework of this MULTILATERAL international body.
So, EVERY country finds its field of UNILATERAL actions MORE and MORE restricted, but it has a RICH CHOICE of contacts on BILATERAL and MULTILATERAL basis. One kind of contacts, however, does NOT exclude another. More, they have the tendency to develop simultaneously, to become closely interwoven, and even to overgrow into each other.
As a result, EACH country has at its disposal a WHOLE SET of UNILATERAL, BILATERAL and MULTILATERAL policies.
* Some topical ISSUES in the development of ANY nation, however, CANNOT be solved otherwise as through JOINT EFFORT with other countries like ECOILOGICAL problems (of air and/or water POLLUTION, etc.), like the permanent threat of HUNGER (FAMINE) in many leastdeveloped regions of the world, like SPACE EXPLORATION or use of OCEAN RESOURCES, etc. Thus, in many cases, the country's participation in INTERNATIONAL COOPERATION on regional and/or worldwide scale becomes ABSOLUTELY NECESSARY.
Being summedup, such NATIONAL issues are overgrowing into REGIONAL and even GLOBAL ECONOMIC AND SOCIAL PROBLEMS, which become the concern of the MANKIND as a whole. They ask for MULTILATERAL, truly GLOBAL institutions and actions.
To global POLITICAL PROBLEMS, usually clearly STRATEGIC in character, also belong such international tasks as the FIGHT AGAINST TERRORISM, as PEACEKEEPING OPERATIONS in many dangerous spots, as international efforts to secure the NONPROLIFERATION of nuclear arms, etc.
Topic 7. BASIC TRENDS AND TOPICAL ISSUES OF EUROPEAN INTEGRATION
Europe is the SECOND SMALLEST of the world's continents occupying an area of about 10,5 million square km, i.e., only ONEFIFTEENTH of the world's total land area. Its population comes close to 800 million people and is characterized by HIGH, in some places (like Ruhr in Germany, like Paris agglomeration in France, like urban Holland and Northern Italy) VERY HIGH, density.
Geographically and socially Europe can be divided into TWO major parts:
# Western (peninsular) Europe, and
# Eastern (continental) Europe.
The Western part is highly industrialized, with developed market economies and HIGH level of PER CAPITA production and income. The Eastern part (including some countries belonging to the socalled Middle Europe) is also rather industrialized, but in a peculiar, we may even say, unnatural way typical for "socialist" orientation of development. It is now in the final stage of transition to market economy, and the incomes of roughly HALF of European population living there are substantially LOWER than in the West.
Roughly ONETHIRD of Europe is considered arable – a much larger proportion, than the world's average of 11%. It partly explains why agricultural issues of economic development remain so important in particular nationstates, in the EU and in Europe as a whole.
The European continent, excluding Russia, is very POOR in MINERAL RESOURCES – the poorest of the world's continents actually. Russia, on the other hand, is the most favorably endowed nation in the world in terms of reserves in NEARLY ALL minerals (except bauxite).
WESTERN EUROPE has NOT very substantial reserves of petroleum (about 3% of the world's total) and natural gas (about 6%) most of which is BENEATH the North Sea. In comparison, Russia has FOUR TIMES as much petroleum and SIX TIMES as much natural gas. The coal reserves are EVENLY DIVIDED between the two parts of EUROPE and together represent about ONETHIRD of the world's reserves.
The WestEuropean MANUFACTURING INDUSTRIES are highly developed, but also highly dependent on the outside world – because they are mostly based on IMPORTED raw materials, and especially on IMPORTED energy. From the basic industries, only FERROUS METALLURGY has local raw material base (coal and iron ore, the main deposits of which are located in Germany and France respectively).
It partly explains many WARS between the two countries in the past. It also helps to understand why the EUROPEAN ECONOMIC INTEGRATION, with its regional SUPRANATIONAL institutions, has begun exactly in the field of coal and iron production – with the formation of the European Coal and Steel Community (ECSC) way back in 1952.
* Historically, Western Europe was actually the FIRST of the big economic REGIONS of the world where integration PROCESSES have quickly overgrown into integration SYSTEM. We may ask "WHY?"
Because many FACTORS (prerequisites) for exactly that pattern of development did exist there.
# ECONOMIC and NATURAL factors:
geographical PROXIMITY,
high grade of COMPLEMENTARITY of national economies (diverse agricultural bases, various industries, different natural resources),
highly developed MUTUAL TRADE asking for elimination of trade barriers on INTRAregional basis,
strong American COMPETITION forcing European countries to unite their efforts in creating mighty "EUROPEAN COMPANIES" which could enjoy advantages of the economy of scale and thus achieve high competitiveness of their products.
# POLITICAL and SOCIAL factors:
political AMENABILITY between Western European countries, their COMMON history, COMMON political traditions (democracy), COMMON culture based on JUDEOCHRISTIAN tradition, COMMON awareness of being EUROPEAN, good knowledge of FOREIGN LANGUAGES,
COMMON threat of "COMMUNISM", COMMON danger of a Soviet military INVASION,
strong BACKING by the United States, and at the same time – the NECESSITY of EUROPEAN UNITY to be able to keep back the American economic and political influence in Europe.
* Officially, the FIRST element in EUROPEAN INTEGRATION SYSTEM was the implementation (in the early 1950s) of the European Coal and Steel Community (ECSC) by SIX European countries France, West Germany, Italy, Belgium, The Netherlands, and Luxembourg (the last three are also members of the socalled "Benelux", classical customs union dating back to 1920s). It allowed to unite the METALLURGICAL industries of the neighboring countries and to create a COMMON MARKET for coal, coke, iron ore, steel, etc.
However, the first MAJOR step in creating a REGIONAL INTEGRATION SYSTEM has been made in 1957 when the European Community (or EC, originally called the European Economic Community EEC) was established by the same SIX European nations through signing of the Treaty of Rome (by the way, simultaneously with the introduction of the European Atomic Energy Community "Euratom")
Until May 2004, the European Union (or EU, former EC which was renamed so as from January 1, 1994) included FIFTEEN European countries the original "SIX" founding members (France, Germany, Italy, Belgium, The Netherlands, and Luxembourg), plus United Kingdom, Ireland and Denmark (which joined the EC in 1973), Greece (since 1981), Portugal and Spain (since 1986), as well as Austria, Finland and Sweden (since 1995).
Thus, ever more integrated and steadily expanding REGIONAL ECONOMIC SYSTEM emerged, with a population visibly exceeding that of the United States and Japan, and with a cumulative GNP which comprised – in 1995, for FIFTEEN then membercountries – over 29 percent of the world’s total (as against 25 percent for the U.S. and about 18 percent for Japan).
The EU (former EC) has been often characterized as "the world's largest multinational market" or as a "major multinational market group" uniting "interdependent nations of supranational community".
Several other nations applied for ECmembership in different years (Turkey, Malta and Cyprus, even Switzerland and Norway). Since the 1990s, several NEWLY INDEPENDENT "postsocialist" states in Middle Europe, including Poland, Czech Republic, Slovakia, Hungary, Slovenia, Bulgaria and Romania, as well as the socalled Baltic states – Estonia, Latvia, and Lithuania, – all expressed their wish to join the EU as soon as possible.
So, as from May 2004, the European Union embraced TWENTY FIVE countries with a population over 450 million considerably MORE than previous FIFTEEN (we shall turn to this question later). In 2005, American GNP reached almost 13 trillion dollars, while the aggregate GNP of the European TWENTY FIVE exceeded 14 trillion dollars. Since then, first Bulgaria and Romania, and in 2013 Croatia have also gained the EU membership.
* The basic LEGISLATIVE FRAMEWORK of the original European Economic Community or "Common Market" was created by the Treaty of Rome. It was aimed at facilitating:
# removal of BARRIERS TO TRADE among the membernations (a sign of "negative integration"),
# establishment of a COMMON CUSTOMS SYSTEM on the Community border (the creation of a "customs union” – a "positive integration" measure),
# introduction of COMMON COMMERCIAL POLICY towards nonmember states,
# eventual COORDINATION of transportation systems, agricultural policies, and general economic policies (all of this – elements of "positive integration"),
# removal of private and public policies restricting FREE COMPETITION (the ANTIPROTECTIONIST measures, important elements of "negative integration"),
# in addition to free mutual trade in GOODS, also full mobility of LABOR, CAPITAL and SERVICES had to be assured within the Community (the socalled "FOUR FREEDOMS", i.e., a set of "negative integration" measures aimed at creation of a truly COMMON MARKET). This goal, however, was achieved only IN PART.
* The Treaty of Rome created several important economic and political bodies (organs) of SUPRAnational nature (i.e., having legal status and extensive powers in fields covered by common policies). Some of them are:
# ECONOMIC organs:
The European Commission (or simply "Commission"), which is charged principally with implementation of various treaties issued by the Council of Ministers (so, it is a typical EXECUTIVE BODY of SUPRAnational character). The now 18 Commission members are independent from their national states and act only in the interest of the EU (there have been 20 Commissioners until May 2004 and 27 in the period since that date and until the Treaty of Lisbon has been adopted in 2007). They can both propose legislation and implement EU policies.
It is important to notice that the European Commission is entitled TO REPRESENT the EU in international negotiations. This means that in many practical cases the EU can take part in negotiations (can negotiate) AS A SINGLE ENTITY.
The Council of Ministers includes one representative, or "minister", from each member state, although with QUITE DIFFERENT number of VOTES (from overall number of 345 votes, Germany and France have 29 votes each, while the UK and Spain, for example, have 27, etc.). The Council of Ministers has the real power of decision, and thus is the main LEGISLATIVE BODY of the EU. It also determines HOW treaties are to be carried out and HOW separate economic policies of the member nations are to be coordinated to achieve goals set in these treaties. Under new provisions, the Council can enact proposals into law by majority vote instead of unanimity formerly required (except for few questions, such as taxation) a VERY IMPORTANT change of rules.
Lately, the Council of Ministers is more and more often called the Council of the European Union. However, we should distinguish it from the European Council the SUMMIT MEETINGS of the Heads of State or Government, since 1974 taking place twice a year and based on consensus. And, of course, it should be also clear that the Council of Europe (CoE), of which the Russian federation is a member, is something else again.
# POLITICAL organs:
The European Parliament is the QUASY LEGISLATURE of the Union. It can influence legislation, but until 1993 it did NOT have the power to initiate legislation (traditionally, this right lies with the Commission, and the Council takes actual decisions). The 750 members of the Parliament (there is also a President – to avoid deadlocks during the votes) are apportioned among the member states and elected every 5 years by direct universal suffrage (the principle is called “degressively proportional representation” – minimum 9 sits for a country, maximum – 90 sits). Within the Parliament, several main POLITICAL FACTIONS are formed which unite MP elected from different countries but espousing similar political views. Many standing committees with the task of preparing new legislative acts (on budget, etc.) are working within the Parliament's framework. It is expected that the political role of the Parliament will visibly grow and it will become a fullfledged legislative body. An important function of the Parliament consists also in electing the President of the Commission.
The Court of Justice is the SUPREME COURT of the EU. Its first responsibility is challenging any measures incompatible with the Treaty of Rome when they are adopted by the Commission, Council, or national governments. Its second responsibility is passing judgment, at a request of a national court, on the interpretation or validity of points of EU law. The court's decisions are FINAL and can NOT be appealed in national courts. They are BINDING on EU members and OVERRULE those of national court. So, it is a strong SUPRAnational legal body.
* On the base of the Treaty of Rome and later agreements, several COMMON POLICIES of the memberstates have been developed. The main of them are:
# COMPETITION RULES. Special regulations on competition practices have been adopted which have precedence over national legislation, but do NOT replace it. This legislation forbids restrictive agreements and practices which affect trade between member states, as well as government aid to business aimed at achieving dominant position on the European market. So, this legislation is mainly intended to secure enough COMPETITION.
# The COMMON AGRICULTURAL POLICY (CAP) is a very important element of the European integration system. It is responsible for almost THREEQUARTERS of the EU budget expenditures. Agriculture is heavily subsidized and highly protected within the EU – mainly by setting MINIMUM PRICES for producers and levying high TARIFFS on food imports.
The CAP forms major annoying factor in international politics created by the EU. For example, it is strongly influencing the EuropeanAmerican relations. At the GATT (WTO) negotiations (Tokyo Round and Uruguay Round, as well as the current Doha Round) the CAP was strongly criticized because of its interventionist and protectionist approach which causes high prices for European consumers and has discriminating effect on nonEU suppliers.
# TRANSPORTATION POLICY. For international trade, transportation costs are of vital importance; they are in fact part of production costs. So, without COMMON POLICY in the field of transportation, production costs in the Community's industries could be distorted by differences in NATIONAL transportation conditions and rules.
# INDUSTRIAL POLICY can be defined as government actions aimed at influencing industry (first of all – its structural development). So, it is a kind of active interventionist ("dirigist") policy, and as such causes debates within the EU and around it. Still, some elements of COMMON industrial policy were and are used in restructuring DECLINING industries – like coal and steel production, shipbuilding, textile and clothing. In NEW documents regulating economic policies of the EU, cooperation between European companies in the area of R&D and their support by the national governments are legally approved and encouraged. All this is because Europe is afraid to lose the TECHNOLOGY RACE to Japan and to the USA.
# REGIONAL POLICY. Like agricultural policy, COMMON regional policy is NOT quite in line with freemarket orientation of the Union. Still, it is used for SELECTIVE support of the weakest countries and regions – like Portugal, Greece, Bulgaria, or Southern Italy,
# TAXATION, SOCIAL AND ENVIRONMENTAL POLICIES. Some COMMON elements in these policies are adopted with the aim of UNIFYING economic conditions within the Community and securing fair competition. By the way, it explains the reason why the "European INTEGRATION" is often called "European UNIFICATION".
It is well known that such factors as taxes, social security contributions or pollution standards affect costs of production. So, the EU undertakes measures to achieve a certain HARMONIZATION and STANDARDIZATION of tax rates, pollution norms, health requirements, etc. The results, however, are rather MODEST, especially in the field of TAXATION, where the decisionmaking process, now as before, involves UNANIMITY in the Council of Ministers.
# MONETARY POLICY. This is "last, but not least" direction in working out COMMON policies of the EU (former EC).
The call for a European monetary policy arose after the collapse of the Bretton Woods system of fixed exchange rates in 1971. After a series of negotiation, the European Monetary System (EMS) came into force in 1979 introducing the principle of "monetary snake" in regulating the exchange rates of individual currencies. According to EMS arrangements, currencies of the member states were allowed to fluctuate (the socalled regime of floating exchange rates), but only in a certain narrow interval (from 2,25 to +2,25% around the "central rate").
MONETARY STABILITY is of vital importance for the Union, so the EMS has become a major tool of securing favorable CONDITIONS for ECONOMIC GROWTH.
* However, further MONETARY INTEGRATION could NOT be envisaged without closer economic and political RAPPROCHEMENT (cooperation) between the member states. Thus, monetary issues played major role in preparing such NEW big steps in EUROPEAN ECONOMIC INTEGRATION as the adoption of the Single European Act (1985) and the signing of the Treaty of Maastricht (1992).
According to these TWO documents of paramount importance, by the end of the 20th century the Economic and Monetary Union (EMU) has been established – with improved and developed EMS as one of its major elements.
The transition from a "Common Market" and the EMS to a "Single Market" and the EMU was effected in THREE stages:
1. completion of SINGLE (or INTERNAL) MARKET within the EU (we shall discuss it a bit later) and securing truly FREE MOVEMENT of capital,
2. creation of the European Central Bank (Eurofed) and closer cooperation in matters concerning MONETARY POLICIES,
3. introduction of a SINGLE European currency (which later received the name of the "euro") not later than by1999, with the aim of replacing national currencies of the member states as from 2002.
* Now, we have to return for a while to HISTORY in order to follow the course of European integration.
Progress toward the achievement of the "FOUR FREEDOMS" (conditions making possible for goods, people, capital and services to move unhindered throughout the Community) has NOT been spread evenly over the 40 years since 1958.
Events moved rapidly in the first 10 years. The SIX original member states removed ALL tariffs and quotas on their internal trade in July 1968, 18 months ahead of schedule. By this time, they had also finalized their CUSTOMS UNION by creating a single set of tariffs on imports from the outside world (from the "third" countries).
INTERNAL TRADE (i.e. the exchange of goods among the member countries) was and is of major importance to the EU. After the introduction of regional free trade arrangement and the common customs tariff, the INTERNAL trade turnover has grown rapidly and, since the early 1990s, amounted to about 60 percent of the overall trade figures of the European Union. However, several NONTARIFF BARRIERS to its INTERNAL trade still remained preventing completely free movement of goods and services within the COMMON MARKET. That is why the next goal has been to create much more free SINGLE MARKET conditions.
Taken as a whole, the European Union is by far the BIGGEST world trader. It is responsible for almost TWOFIFTHS of world merchandise EXPORTS, against about 12 percent share of the USA and just over 9 percent of Japan. However, if we EXCLUDE from the world figures the INTERNAL TRADE within the EU, the whole picture would CHANGE: the relative importance of the EU exports would be reduced to 20 percent, while the American and Japanese share would rise to 16 and 12 percent, respectively.
Still, the EU involvement in trade with the socalled THIRD countries is big by any standards. To better understand the patterns of EU INTERNAL and EU EXTERNAL trade, both in respect to their GEOGRAPHICAL DISTRIBUTION and PRODUC STRUCTURE, please, look for the latest respective statistics which can be easily found in the Internet.
* However, returning to HISTORY, we have to notice that PROGRESS towards further integration SLOWED DOWN during the 1970s and early 1980s. One reason was the need to absorb THREE newcomers Britain, Ireland and Denmark who joined the EC in 1973. The second, and more important obstacle was an economic RECESSION which followed TWO international OIL SHOCKS in 1973 and again in 1979.
Generally, there were always strong CONTRADICTIONS among major partners concerning the development of the Community, i.e., CONTRADICTIONS between:
# DEEPENING of integration – and its WIDENING,
# between advocates of SLOW and GRADUAL ("stepbystep") motion – and those who preferred QUICK and RADICAL changes (in "big moves").
These contradictions developed mostly between France and Germany, on the one side, and the United Kingdom (Britain), on the other side. The continental powers were, and still are, mainly in favor of a QUICK development toward DEEPENING of integration, and Britain with some of its allies – for SLOW movement forward on a WIDEST possible geographical basis.
It was Jaques Delors who injected a NEW DYNAMISM into the achievement of "four freedoms" when he became President of the European Commission in 1985. He launched the SINGLE MARKET initiative (together with Lord Cockfield who prepared a White Paper fixing the timetable of transition).
* So, on this basis the Single European Act (SEA) was drafted and agreed in December 1985 – with an aim to introduce SINGLE MARKET conditions as from January 1993.
The difference between "COMMON MARKET" and "SINGLE MARKET" is exactly in the DEEPNESS of the market integration. The SECOND means destroying the remaining obstacles to trade and forming a market system which is in many ways similar in quality to "INTERNAL MARKET" of a country but embraces the whole of the EU. The main aim of the SEA was formulated as follows: "to create a large, free internal market characterized by strong and free competition".
One of the key innovations of the SEA was to extend the use of MAJORITY VOTING in place of UNANIMITY in the Council of Ministers. It also brought the European Parliament more closely and more actively into decisionmaking process. Without MAJORITY VOTING, it would have been IMPOSSIBLE to have the SINGLE MARKET ready by the end of 1992.
* It was the awareness of growing GAP between Europe and its rivals (America and Japan) in the field of fastgrowing HIGHTECH industries that became major driving force behind the SPEEDINGUP and DEEPENING of the integration processes within the Community at the end of the 1980s.
Accordingly, it was the dynamism created by the introduction of SINGLE MARKET that has inspired the EU to extend integration into critical, but sensitive areas of POLITICAL UNION and ECONOMIC AND MONETARY UNION (EMU).
* The Treaty of Maastricht (or the Maastricht Treaty, or – officially – the Treaty on European Union), signed in February 1992, has set ambitious timetable for the attainment of both an EMU and something like a real political union. The Treaty represents the BIGGEST CHANGE in the EC charter (rules) since its creation, i.e., since the Treaty of Rome, for which it serves as an important addition (or amendment).
On the way to a POLITICAL UNION, the Maastricht Treaty aimed at creating the socalled "THREE PILLARS" of the EU common policies:
PILLAR ONE involving common measures in such sensitive areas as TAXATION, INDUSTRIAL POLICY, CULTURE, use of REGIONAL and SOCIAL FUNDS, etc. It is important to notice that in such vital areas DECISIONS in working out COMMON POLICIES remain subject to UNANIMITY voting of all member countries.
PILLAR TWO involving the "Common Foreign and Security Policy" (please, note the mechanism of DECISIONMAKING in these vital spheres has to be created yet, while contradictions around it are very strong). In June 1999, at the EUSUMMIT in Cologne, Germany, 15 leaders selected Javier Solana, then NATO Secretary General, to be the first EU foreign policy chief a new position designed to give the European Union more clout and recognition on the international arena. Also, in 1998 at a EU summit in St. Malo, a "“Euro Defense” project has been adopted providing for the creation of a special European Rapid Reaction Force – ERRF, to be used (independently from NATO) for peacekeeping, disasterrelief and humanitarian operations. However, later a compromise decision has been taken – to establish a “EU PLANNING CELL” at the NATO’s high command headquarters, instead of original plans for an own EU headquarters separate from the NATO.
PILLAR THREE providing for COOPERATION in the fields of "Justice and Home Affairs" (also rather sensitive areas where any practical POLICY UNIFICATION is rather difficult to attain, especially with growing number of the member states in the next few years).
* However, those were NOT the political aspects of the Maastricht Treaty that made it such a widelydiscussed and controversial document. Rather, the public attention focused around the grandiose project of creating the Economic and Monetary Union (EMU), including the idea of the euro as a SINGLE CURRENCY.
In 1996, the EU leaders gathered in Madrid to open the InterGovernment Conference (IGC) which had to perform an important and prolonged work of evaluating progress in implementation of the Maastricht Treaty and of preparing the EU for acceptance of new members before the end of the century.
During this work which has taken more than a year (the IGC session lasted from March 1996 to June 1997), it turned out that by far NOT all EU members were ready to adopt a SINGLE CURRENCY according to the Maastricht plan, i.e., as from 1999. In other words, some countries hardly could meet the main FINANCIAL CRITERIA applied to those who were going to introduce the euro as "founding members" of the SINGLE CURRENCY system – the yearly BUDGET DEFICIT not exceeding 3 percent of their Gross Domestic Product (GDP) and the total outstanding GOVERNMENT DEBT below 60 percent of the GDP.
However, by the spring 1998, it became clear that finally only ONE country Greece, was unable to meet the justmentioned "Maastricht criteria" on time to become one of the "founding members" of the EMU. And THREE countries Britain (the U.K.), Denmark and Sweden have chosen NOT to join, at least in the "first wave", on POLITICAL grounds.
Thus, in May 1998, during the EUsummit in Brussels, those were 11 countries that joined the new singlecurrency system and agreed on fixed EXCHANGE RATES at which their national currencies had to be locked on January 1, 1999.
So, while 11 EUmembers, with total population of about 300 million people, were ready and willing to go ahead according to the schedule adopted in Maastricht, FOUR countries "lagged behind", thus forming a kind of "SLOW LANE" in the European "INTEGRATION TRAFFIC" (and ONE MORE, even “SLOWER LANE” has emerged after NEW MEMBERS joined the EU in 2004).
The SINGLE CURRENCY has been first introduced in 1999 (during the socalled Phase A), and after threeyear TRANSITIONAL PERIOD (Phase B), i.e., since January 2002, the 11 original member countries plus Greece, which managed to considerably improve the position of its drahma, said goodbye to their traditional means of exchange to the Austrian schilling, Belgian and French francs, to the Dutch guilder and, above all, goodbye to the Deutsche Mark one of the greatest "success currencies" of all time, matched only by the Swiss franc and the Japanese yen for sheer hardness and soundness.
Of course, there was NO guarantee whatsoever that the euro as the SINGLE CURRENCY of the emerging "Euroland" would be as good and as strong as hoped. However, after a shirt dive at the very beginning, the euro has been enjoying rather high exchange rates to the US dollar. Anyway, as of mid2014, the euro has been already introduced in 18 countries, including Slovenia, Slovakia, Malta, Cyprus, Estonia and, finally, Latvia. Lithuania is going to use the euro from 2015
* The rather modest SET of DOCUMENTS signed in Amsterdam in June 1997, which is often summed up under the name the Amsterdam Treaty, provided LEGAL BASIS for further work aimed at bringing necessary changes into the EU charter so that the negotiating process with potential NEW MEMBERS could have started.
Public attention was obviously switched from the issues of DEEPENING the integration (like the introduction of the euro or implementing the idea of Common Foreign and Security Policy "PILLAR TWO" of the Maastricht Treaty) to the institutional preparations for its WIDENING through NEW MEMBERSHIP.
All in all, 13 countries have lined up to apply for the EU membership Cyprus, Malta and Turkey, and 10 TRANSITIONAL SOCIETIES ("postsocialist" countries) of Eastern Europe.
At the historic EU summit in Athens, in April 2003, TEN countries have been chosen to join the EU as from May 2004 (EIGHT former Soviet bloc countries – the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, and also Cyprus and Malta). Bulgaria and Romania were still engaged in their entrance negotiations, while the question with the membership of Turkey has been “put on the back burner.”
* This NEW situation demanded some MAJOR ALTERATIONS in the INSTITUTIONAL STRUCTURE of the EU. Unfortunately, NO such organizational CHANGES could have been agreed upon in Amsterdam. This created a rather unstable situation in the EU dangerous for its future and the prospects of expansion.
At last, minimal necessary CHANGES have been agreed upon in December 2000 at Nice (France) by the EU summit chaired by French President Jacques Chirac. The NEGOTIATIONS were extremely difficult, but the achieved RESULTS can be evaluated as quite satisfactory.
The Treaty of Nice contains about TEN important points concerning future institutional structure and decisionmaking mechanism of the EU. For example, the EU leaders agreed on NEW VOTING PROCEDURES in the Council of Ministers to give the most populous countries Germany, France, Britain, Italy and Spain greater say (i.e., stronger representation) in deciding policy. In many new fields MAJORITY VOTING has been introduced, although the most contradictory issues, such as TAXATION, SOCIAL SECURITY, IMMIGRATION POLICY, will demand UNANIMITY as before (i.e., countries keep the right to use VETO against the decisions unacceptable to them). The number of the EUROPEAN COMMISSION members has risen from 20 to 27. The “big” countries have stopped having TWO commissioners each and are since represented by ONE, while “small” countries and potential new members are NOT guaranteed permanent representation and will depend on ROTATION procedures.
In February 2002, the 105member Convention on the Future of Europe held its inaugural meeting in Brussels. It was established in December 2001, during the EU summit in Laeken, Belgium, and received a mandate for one year to prepare the Intergovernmental Conference of 2004. The Laeken Declaration instructed the Convention to deal with FOUR broad areas:
better division and definition of jurisdiction within the EU (basically: who does what?),
simplification of the union’s working instruments (regulations, directives, etc.),
increase in the EU democracy and efficiency (the role of the Commission, the way its president would be elected, etc.),
preparation of a “Constitution for European Citizens.”
In May 2003, the Convention head, Valery Giscard d’Estaing, introduced the first draft of the future EU Constitution, which was both much praised (first of all, for the PRIMACY of NATION STATES incorporated in it) and much criticized (for example, for the idea of a longterm elected chairperson of the Council serving as a kind of “EU President” and thus competing with the existing post of the European Commission President).
Towards the end of 2003, stormy highlevel negotiations discussing the draft of the EU Constitution collapsed and have been postponed as a result of a deadlock over VOTING RIGHTS. The draft has proposed controversial changes in the NUMBER of VOTES stipulated for some countries, namely for Spain and Poland, by the Treaty of Nice, and for some time NO COMPROMISE seemed to be possible. Although later this deadlock has been resolved, the overall prospects concerning the introduction of the Constitution remained uncertain – until mid2005, when first the French and then the Dutch said “no” to the whole project in their national referenda, thus delivering two hard blows to the Constitution idea.
* Facing the collapse of the constitutional project, the EU lingered for a while and in the end, on December 13, 2007, signed in Lisbon a new treaty aimed at rethinking some of the ground rules for working together. Thus, the Treaty of Lisbon was regarded as “the next best thing beside the Constitution”. It defined “what the EU can and cannot do, and what means it can use.”
Prominent changes introduced with the Treaty of Lisbon include more qualified MAJORITY VOTING in the EU Council, increased involvement of the European Parliament in the legislative process through expanded codecision with the EU Council, reduction of the number of Commissioners from 27 to 18, eliminating the aforementioned “pillar system”, and the creation of the new post – of the President of the European Council and High Representative for Foreign Affairs to present a united position of the EU whenever and wherever necessary.
The Treaty could NOT be applied until and unless it has been ratified by each of the EU 27 members. It was up to each country to choose the procedure for ratification, in line with its own national constitution. The target date for ratification set by member governments has been 1 January 2009 – some months before the election of the European parliament. The rejection of the Treaty on June 12, 2008 by the Irish electorate and the repeated postponement of its ratification by the Czech Republic meant that it could not be put into force yet. However, since then, the ratification process has been successfully concluded by all the countries including Ireland.
In October 2010, facing serious financial difficulties in several member countries, the EU and its ruling body – the Commission have worked out some AMENDMENTS to the Lisbon Treaty, providing for a stabilizing mechanism to prevent further financial troubles. They include the introduction of a permanent fund which can be used for the stabilization of the euro, a new common mechanism for economic monitoring in individual countries, and even the possibility to use sanctions against countries which would break the financial discipline. All those measures have been subject to a further discussion and an approval at the next EU Summit in December 2010. In 2011, the financial resources at the disposal of the European stabilization fund have been enhanced – with an aim of saving such hopeless debtors as official Greece and, eventually Portugal and Italy.
* Asides of mainly successful, but rather controversial developments within the EU, one more institutional CHANGE (very important and useful!) has taken place in Europe during the 1990s. It was the introduction of INDUSTRIAL FREE TRADE AREA arrangements between the then European Community (EC) and European Free Trade Association (EFTA), reached in 1992 and set into force as from January 1993.
It represented a strong manifestation of the tendency towards WIDENING integration processes on the European continent.
The European Free Trade Association (EFTA) was formed in 1959 as a kind of COUNTERBALANCE to the EC. It was a typical FREE TRADE AREA arrangement, which liberalized trade in INDUSTRIAL goods between its members, but did NOT touch upon their trading policies towards the countries outside the group.
The arrangement was originally signed by the "OUTER SEVEN” – Austria, Denmark, Norway, Sweden, Portugal, Switzerland (with Liechtenstein), and the United Kingdom. Finland became an associate member of EFTA in 1961, Iceland was admitted as full member in 1970. In 1973, however, the United Kingdom and Denmark became members of the EC (EU) and left EFTA. So did Portugal in 1986, and Austria, Finland and Sweden in 1995.
As COUNTERBALANCING force in relations with the EC, this MULTINATIONAL market (trading) group was NOT strong enough. However, the EFTA managed to create a beautiful and effective arrangement of INDUSTRIAL FREE TRADE AREA – a welcome addition to the EU own freetrade arrangements of the first COMMON MARKET and later the SINGLE MARKET type.
It is very important to notice that nowadays this arrangement includes ALL 28 members of the EU (former EC) and THREE of the FOUR members of the EFTA (Norway, Lichtenstein and Iceland, but NOT Switzerland, which has concluded with the EU a special bilateral free trade agreement), thus embracing 30 European countries. It received a new name the European Economic Area (EEA). Its emergence signifies the fact that the spreading of INTEGRATION PROCESSES in Europe is going on and can take very DIFFERENT organizational FORMS. Nowadays, practically all the EFTA members enjoy the benefits of the SINGLE MARKET created by the EU without participating in other policies and institutions of the Union.
So, we can sum up that the Single European Act, the Treaty of Maastricht and the Treaty of Lisbon represent the DEEPENING of the integration processes on the European continent, while the new membership in the EU, as well as the reorganization of the EFTA and the development of the EEA manifest their WIDENING.
* Speaking about American ATTITUDE to former EC and now EU, we must note that this attitude always had at least TWO sides to it:
# on the one side, the United States secured the European integration, and EC in particular, their strong POLITICAL BACKING, and during all these decades Europe and America have been acting as the closest ALLIES to each other,
# on the other side, however, American capital regarded the customs union arrangements and the common policies of the EC (especially the CAP) as a BIG NUISANCE (annoyance) in the field of international trade. The American answer to this nuisance was, however, very simple and practical: "to jump" over the UNIFIED (COMMON) trading barriers surrounding the EU by arranging MASSIVE CAPITAL MIGRATION to Europe, mostly in form of FOREIGN DIRECT INVESTMENT (FDI).
* For Japan, the "United Europe" always was interesting enough through its large MARKET CAPACITY, high INCOMES and modern STRUCTURE OF CONSUMPTION. So, many Japanese firms penetrated the Community market using their relatively LOW production costs, HIGHTECH characteristics of products and SOPHISTICATED selling practices. And politically both sides stay allies as well.
In trade relations with Japan where the EU position is characterized by a permanent, albeit diminishing DEFICIT, the OPENING of the Japanese market is regarded as the main longterm issue.
* Overall, it looks like Asia and Europe have decided it is time to become better acquainted.
The FIRST ever AsiaEurope Meeting on the HIGHEST level (ASEM summit) took place in Bangkok in March, 1996.
Many participants spoke about the need for an INSTITUTIONAL FRAMEWORK to govern relations between Asia and Europe, complementing those already in place across the Pacific and Atlantic. It was stated that while links between Asia and North America were STRONG, the Euro East Asia linkage was very WEAK.
Europe sent to Bangkok 16 representatives: ONE from EACH member country, and President of the European Commission speaking for the EU as a whole.
On the Asia side of the table, attendance at the summit was limited to TEN countries: the then seven states of ASEAN (Indonesia, Malaysia, Thailand, the Philippines, Singapore, Brunei, and Vietnam) plus China, Japan and South Korea. Thus, Russia was NOT invited, and India, second only to China in terms of population, has expressed its deep disappointment with the state of matters around the Bangkok summit too.
The SECOND ASEM summit gathered in London in April 1998. It was more businesslike in nature, and established ASEM Trust Fund at the World Bank and a Center for Financial Restructuring providing European expertise to Asian countries.
The THIRD AsiaEurope summit has taken place in Seoul in October 2000. It adopted the socalled Chairman’s Statement in which the participants’ common view on major political issues has been expressed. Also, “a blueprint for ASEM future” has been approved – the document called AsiaEurope Cooperation Framework – AECF 2000.
The FOURTH ASEM summit has been held in Copenhagen, in September 2002. It confirmed the necessity of further cooperation in the areas of TRADE, INVESTMENT and FINANCE (to promote the use of EURO as a RESERVE CURRENCY among other aims).
* Thus, such “Eurasian” SUMMITS and MINISTERIAL MEETINGS have obviously become an ESTABLISHED PRACTICE in the relations between the two regions. However, lately they have been ever more often criticized for LACK of concrete INITIATIVES and for having deteriorated into something amounting to “not much more than a talk shop.”
In January 2004, ministers of the ASEAN countries met with Pascal Lamy, the then European Union Trade Commissioner, to discuss the recent EU initiative for enhanced ECONOMIC COOPERATION with ASEAN, dubbed the TransRegional EUASEAN Trade Initiative (TREATI). Maybe, these negotiations manifested the beginning of a new wave of activity in an INTERREGIONAL framework.
In October 2008, in Beijing, the SEVENTH ASEM summit gathered high representatives of 27 European and 13 Asian states in a rather tense economic situation very much resembling an early stage in a GLOBAL CRISIS – a fact that placed its obvious imprint on the discussions.
In October 2010, a really important breakthrough has taken place in TRADE RELATIONS between the European Union and the Republic of Korea. During the regular ECAsia Summit, a FREETRADE AGREEMENT between the EC and Korea has been concluded. To be enforced since July 2011, it abolishes all tariff and nontariff barriers in trade between the two sides – a considerable gain for Europe, which has paid about $1,6 billion in duties in 2009, when its trade with Korea amounted to $53 billion, accompanied by a considerable TRADE DEFICIT.
* The DEVELOPING COUNTRIES are somehow divided in their ATTITUDE to the EU. A big part of them, about 70 nationstates around the world – in Africa, in the Caribbean, and in the Pacific (the socalled ACPcountries) were INCLUDED into "Common Market" arrangements through mechanism of ASSOCIATION ("special relations") with the EC (EU). This PREFERENTIAL TRADE REGIME, very favorable for them, was first introduced and developed through several Lome Conventions (called so after Lome – the capital of African country Togo, where negotiations traditionally take place).
In 1996, the European Union enlisted 12 Mediterranean neighbors – Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia, Turkey and the Palestinian Authority – in a farreaching cooperation pact designed to improve subregional stability by lifting TRADE BARRIERS and pumping CASH into their struggling economies.
Other developing nations, however, feel DISCRIMINATED, because their approach to the European market has NOT been made easier by special arrangements. This difference in attitude toward EU can be felt in UNCTAD and WTO negotiations.
In March 1999, a historic TRADE DEAL with South Africa has been approved by the EU summit in Berlin – the bloc's FIRST agreement of this kind with a DEVELOPING country. Under the accord, EU markets will be opened to some 95 percent of South African exports over a 10year period. Probably, this accord will serve as a model for EU future trade relations with Africa, the Caribbean and the Pacific (i.e., with the socalled ACPcountries).
* While practically ALL newborn political entities in "postsocialist" Europe were "looking West", expecting to become members of the European Union sooner or later and dreaming of joining the NATO, Russia faced GROWING ISOLATION and had to think hard about finding her own place in the emerging ALLEUROPEAN system and securing her ECONOMIC and POLITICAL INTERESTS in the region.
However, Russia's economic ties with the EU are for paramount importance for BOTH parties. For many years, the European Union has been IMPORTING from Russia 27 times as much, as the USA, and 8 times as much, as Japan. Russian EXPORTS to the EU, with NATURAL GAS and CRUDE OIL as major commodities, represent an important contribution to the European energy and raw materials supply.
* The new Millennium found Russia with a new President – Vladimir Putin, who has been devoting much time to establishing personal contacts with the EU leaders. However, Russia’s relations with Europe had some troubling aspects, like the HUMAN RIGHTS’ issue in regard to the protracted military operation in Chechnya, like delays in the repayments of DEBTS of the former Soviet Union (in this field, a breakthrough has been achieved in 2005), etc.
This state of affairs remained intact with the next Russian President Dmitriy Medvedev at the head of the RF and with some new issues troubling the EuropeRussia relations (such as the short war with Georgia in August 2008 and the following recognition by the RF of the independence of the two Georgia’s major ethnic areas – South Ossetiya and Abkhasia).
Since 2012, the presidency returned to Vladimir Putin who may eventually keep this position until 2024. In 2014, unprecedented tension around stormy political events in Ukraine and actual warfare in its territory has led to visible worsening of relations between Russia, on the one side, and the European Union, the U.S. and the majority of other democracies, on the other side.
Topic 8. PECULIARITIES OF REGIONAL ECONOMIC INTEGRATION IN NORTH AMERICA
North America is THIRD in size among the world's continents, lying for the most part between the Arctic Circle and the Tropic of Cancer, extending more than 8000 km to within 800 km of both the North Pole and the Equator, covering an area of 24,2 million sq. km.
The ARABLE land accounts for about ONEEIGHTH of the continents total land area. Favored with excellent soils and relatively stable weather patterns, much of the continent's cropland is among the world's most productive.
The continent's FORESTS, greatly diminished since the early settlement, have remained fairly constant in recent years and cover about ONETHIRD of the total land area. One of the world's largest areas of extensive forests stretches across northern Canada from Newfoundland to Alaska.
The continent has adequate reserves of most METALLIC resources and the world's largest reserves of cadmium (about TWOFIFTH), copper (ONETHIRD), lead (more than TWOFIFTH), molybdenum (more than HALF) and zinc (about HALF) and a substantial proportion of its gold, platinum and other precious metals. However, the continent has VERY LITTLE of manganese, and virtually NO chromium – the fact explaining why these product were imported from the former Soviet Union even under the ColdWar conditions.
North American petroleum (crude oil) reserves and natural gas reserves EACH represent more than ONESEVENTH of global reserves. The continent also possesses up to ONETHIRD of the world's reserves of the economically recoverable coal and a substantial proportion of world's uranium. The installed hydroelectric capacity of the continent represents about ONEFIFTH of the world's total.
From the continents POPULATION of about 400 million people, up to 60% live in the United States, roughly ONETHIRD live in Mexico, the Caribbean and Central America (ONEFOURTH in Mexico alone), and only 6% in Canada.
North America has a MIXTURE of highly developed economies (Canada and the United States), developed economies (Mexico, belonging to NIC), more or less developed economies (some parts of Central America and larger Caribbean islands) and developing economies in different stages of industrialization (the remaining nations).
The continent's Gross National Product (GNP) amounts to around $20 trillion, but is distributed between the nations very UNEVENLY, with PER CAPITA production ranging from $50 thousand in the United States and $43 thousand in Canada to LESS than $7 thousand in Mexico and LESS than $400 in Haiti.
In the United States and Canada, the GNP stems mostly from MANUFACTURING and SERVICES (or RATHER from services AND manufacturing), while in the rest of nations MINING and AGRICULTURE are its principal components.
MINING is important throughout most of the continent. ENERGY mineral production includes coal, natural gas and petroleum, and is concentrated in Canada, the United States and Mexico.
Modern MANUFACTURING remains of major importance in the United States and Canada where the HEAVY and TECHNOLOGICALLY COMPLEX industries are concentrated. More or less traditional ENGINEERING (MACHINERY industries) and PETROLEUMbased industries are characteristic for Mexico, while LIGHTER industries and AGRICULTUREbased industries predominate in smaller countries.
The AUTOMOBILE industry is of paramount importance for both American and Canadian industrial structures, and is growing rapidly in Mexico forming NEW center of world's CARMAKING.
The share of the North American countries in INTERNATIONAL TRADE is estimated at about ONEFIFTH, while the BILATERAL TURNOVER in goods and services between the United States and Canada is by far the BIGGEST in the world.
* Each of the world's REGIONS involved in INTEGRATION PROCESSES has a set of general and specific FACTORS determining the tendency toward integration and concrete historical conditions in which it is developing.
This is WHY there are differences in the rise of INTEGRATION SYSTEM in various regions, specifically divergent relationships between its ELEMENTS and particularities in the INTEGRATION MECHANISMS.
In North America, the INTEGRATION PROCESSES embrace all THREE major countries of the continent the United States, Canada and Mexico. As for the INTEGRATION SYSTEM in form of a REGIONAL ECONOMIC COMPLEX, its emergence spread throughout the whole 20th century and involved national economies of the TWO mostly developed countries – the United States and Canada. Mexico is now joining this complex and being functionally integrated into it – a process that will take the next onetwo decades.
* So, when we speak about REGIONAL INTEGRATION SYSTEM in North America (or about NORTH AMERICAN ECONOMIC COMPLEX) in historical terms, i.e., as about something which has already been formed and actually exists, than we have in mind exactly the developments of economic and political relations between the TWO partners the United States and Canada.
The emergence of the U.S.CANADA regional economic complex has taken place in a very distinctive manner, quite different from that characterizing the European integration. This historical development was (and still is) strongly influenced by a number of LONGTERM FACTORS having to do with national economic characteristics, conditions of commodity and capital FLOW between the two countries, and the like.
* Let us name some MAJOR FACTORS influencing INTEGRATION PROCESSES between the United States and Canada and predestining specific characteristics of the emerging INTEGRATION SYSTEM embracing these two countries:
# nearly TENFOLD gap between the United States and Canada in POPULATION (which sets natural limits to market capacity and economic potential)
# same relationship ( 10:1 ) is valid for the OVERALL SCALE of economic activity as reflected in the size of the GNP and other aggregated indicators expressed in value and physical terms (power generation, steel production, industrial and agricultural output, the scale of the service sector, and so on)
# historicallyrooted relative financial WEAKNESS and LOW INITIATIVE shown by Canadian PRIVATE CAPITAL whose development was initially overshadowed by the British influence and subsequently restricted by the role of junior partner imposed on it by American Big Business
# wealth of Canadian NATURAL RESOURCES and their complementary nature in respect to raw materials found in the United States (in this vital field the relationship between the U.S. and Canada is NOT 10:1 but around 2:3)
# virtually total ABSENCE of restrictions on MOVEMENT of shortterm and even of investment CAPITAL between the two countries, free convertibility (conversion) of national currencies (the U.S. dollar and the Canadian dollar), no obstacles to deals with partnercountry's securities (shares and obligations), free transfer of profits, etc.
# very liberal rules of MIGRATION of LABOUR (people) and transfer of personal income abroad.
Thus, a whole scope of incentives for direct intertwining of CAPITAL MARKETS and REPRODUCTIVE PROCESSES of the TWO countries did exist for decades and is still favoring further integration.
And "last but not least", there are GEOGRAPHICAL and HISTORICAL factors:
# territorial PROXIMITY
# similar HISTORICAL background without long record of WARS
# ETHNIC likeness ("melting pots" with strong AngloSaxon component), a common LANGUAGE and many elements of CULTURAL tradition
# very similar ECONOMIC MODELS based on the market mechanism
# same (or very like) MANAGEMENT principles and BUSINESS practices
# approximately same TECHNOLOGICAL level, same attitude to science and education.
* In historical retrospect, the IMPACT of all these FACTORS generally stimulated:
energetic INTRODUCTION (infiltration) of American capital into Canadian economy (mostly in the form of DIRECT INVESTMENT into industrial production)
strong GRAVITATION of the relatively SMALL industrial system of Canada toward POWERFUL economic potential of the American neighbor
very specific FORMS of North American integration, its peculiar MECHANISM
"lopsided" CHARACTER of economic relationship between the United States and Canada, some elements of INEQUALITY between the integration partners.
* The SUM of these FACTORS also provides the KEY to understanding:
# origin of the OPENNESS of the Canadian economy, its strong ORIENTATION towards foreign markets,
# a very specific PRODUCTION STRUCTURE largely subordinated to the needs of American TNC (here we have in mind the socalled "trunkated" character of industrial production when MINING and PRIMARY MANUFACTURING, i.e., initial processing of raw materials representing LOWER links of TECHNOLOGICAL CHAINS, are overdeveloped, while SECONDARY MANUFACTURING connected with finished products and UPPER links of TECHNOLOGICAL CHAINS remains neglected and underdeveloped),
# relatively SMALL EXTENT of Canadian economy's INTERNAL integration; the national economy tends to fall into economic SUBSTRUCTURES of individual PROVINCES – like Ontario and Quebec in the east, or British Columbia in the west – which are MORE INVOLVED in economic exchange with the adjacent (neighboring) AMERICAN STATES, than with each other.
# roots of Canadian NATIONALISM (the so called "PROCANADISM") which has emerged as a natural response by a nation that has arisen, strengthened its statehood, became aware of its distinct historical path – and once again faces the danger of losing these gains and being absorbed into American system.
* By EXPORTING CAPITAL in the form of DIRECT INVESTMENT on a large scale, the American TNC created in Canada TWO groups of industries:
ONE GROUP was intended to provide stable and largescale DELIVERIES (SUPPLY) of INDUSTRIAL MATERIALS, i.e., of raw materials and semifabricated products (metal ores, asbestos, steel and nonferrous metals, oil and gas, lumber, pulp and newsprint) to America,
ANOTHER GROUP was aimed at securing strong position on Canadian domestic CONSUMER MARKETS.
At the same time, foundations were laid for regular and extremely largescale American EXPORT to Canada of MACHINERY AND EQUIPMENT (engineering products) used in MINING, CONSTRUCTION and MANUFACTURING.
Thus, underlying the enormous scale and stable expansion of TRADE TURNOVER between the United States and Canada is a deep, TECHNOLOGYbased DIVISION OF LABOR between their industrial companies, with a DECISIVE ROLE played by the migration of American private capital (DIRECT investments) into Canada.
National CUSTOMS TARIFFS of the two countries contributed much to the existing PATTERN of reciprocal (mutual) commodity exchange, while the overall degree of TRADE LIBERALIZATION in the region remained remote (far) from the CUSTOMS UNION conditions created within the European Community.
So, from the 1930s, when the American and Canadian CUSTOMS SYSTEMS have taken shape, a "STATUS QUO" emerged whose BASIC FEATURES have been:
# predominance of INDUSTRIAL MATERIALS in Canada's exports to the U.S, and
# reciprocal American supply of FINISHED PRODUCTS intended primary to satisfy Canadian INVESTMENT DEMAND (i.e., imports of machinery and equipment).
As for the goods intended for Canadian CONSUMER market, American TNC produced them mostly LOCALLY, i.e. in Canada itself, establishing there "MINIREPLICAS" of their American plants – the fact explaining LOW efficiency and HIGH costs of Canadian SECONDARY MANUFACTURING production (FEW plants of optimal size, NO economy of scale advantages, NO or LITTLE new technology, etc.).
* Thus, the CRUCIAL FEATURE of North American integration, as compared with Europe, lies in the fact that the mechanism of the rise and operation of the U.S.Canada regional economic complex is marked by clearly apparent "INITIATIVE FROM BELOW", while "INITIATIVE FROM ABOVE", i.e., special BILATERAL (intergovernment) regulating and stimulating MEASURES were almost totally ABSENT.
# In other words, the PRIVATE CAPITAL ELEMENT absolutely prevailed in North American integration, so that INTEGRATION PROCESSES developed actively at the MICRO and MESOlevel forming close TIES between American and Canadian capital and thus serving relations of SPECIALIZATION and COOPERATION.
For decades, the initiative was firmly in the hands of American TNC, while the Canadian capital export to the USA was trifling (insignificant) in size. Since the middle of the 1970s, however, the situation changed radically, and now the Canadian DIRECT and PORTFOLIO investment in American economy is counted in dozens of billions of dollars.
So, the fabric of U.S.Canadian relations is closely knit below GOVERNMENTAL LEVEL, and those have been "PRIVATE ACTORS" (mostly American firms), who have played major role in forming NORTH AMERICAN INTEGRATION SYSTEM with highly interlaced processes of REPRODUCTION and CAPITAL ACCUMULATION.
# As for the MACROlevel, the role of national state bodies was largely reduced to UNILATERALLY creating certain favorable preconditions for integration on the MICRO and MESOlevel in the shape of extremely specific climate (or background) for economic activities across the border.
Such factors as FREE FLOW of capital between the two countries, unrestricted currency CONVERTABILITY and FREE MIGRATION of population in search for jobs, meant the solution of many problems of NEGATIVE INTEGRATION – beforehand and without any formal legal instruments on BILATERAL (REGIONAL) scale.
That is WHY the integration measures on the MACROlevel have been for a long time almost TOTALLY ABSENT in North America. There are very FEW bilateral (intergovernment) TRADE and ECONOMIC arrangements in the practice of AmericanCanadian relations and NO joint institutions such as the famous SUPRAnational agencies of the EU.
It also explains WHY in the last decade the emphasis has been made exactly on FREE TRADE agreements which have been directed at OVERCOMING major obstacles on the way to further integration – the remaining TARIFF and NONTARIFF BARRIERS holding back the growth of the INTRAregional turnover.
* For decades, the United States and Canada remain major trading partners for each other (now, their yearly BILATERAL trade turnover exceeds $500 billion). With less than ONEFIFTEENS of the population of European Union, Canada imports MORE American goods than the EU. It is TWO TIMES more than American sales to Japan with its population exceeding 120 million people, and FOURFIVE TIMES more than American deliveries to the United Kingdom.
Canada's share in U.S. export and import has been between 16 and 20 percent, and in a whole range of goods it is the CHIEF SOURCE of supply for American industry. Thus, Canadian deliveries practically FULLY meet the import requirements of the United States in natural gas, potassium salt, uranium, pulp and paper, newsprint and asbestos, about FOURFIFTH of U.S. needs in lumber, about TWOTHIRDS in aluminum, nickel, molybdenum, and HALF in zinc and copper.
For its part, over ONEQUARTER of the Canadian GNP originates in one way or another from its trade with the United States. By some estimates, every SECOND job in the production of goods is directly or indirectly related to servicing American market. AmericanCanadian turnover in ONE commodity group "automobiles and parts" exceeds Canada's entire trade with Western Europe AND Japan combined. During the 1990s, America's SHARE in Canadian exports and imports have risen from 7578 percent to over 80 percent and generally remain there.
Calculations show that the MUTUAL ATTRACTION between the United States and Canada as TRADING PARTNERS traditionally was (and maybe also remains) stronger than that between European countries belonging to the EU.
* Historically, the CUSTOMS SYSTEMS of the two countries contained many RESTRICTIONS which were holding back the INTRAregional movement of goods (especially FINISHED GOODS – products of the SECONDARY MANUFACTURING industries). Still, we can name at least THREE big commodity groups which for decades have been characterized by a very LIBERAL regime of MUTUAL (AmericanCanadian) exchange of goods boarding at FREE TRADE conditions:
# FARM MACHINERY. This commodity group includes broad range of products servicing the agricultural activity (harvesters of different kind, tractors, etc.). However, contrary to widespread conviction, there is NO interstate agreement on dutyfree reciprocal trade in farm machinery. In the interests of local farmers, EACH of the sides has introduced LIBERALIZATION of relevant import UNILATERALLY: the United States back in 1913 and Canada in 1944.
This example shows that sometimes INTEGRATION on SECTORAL basis can go on WITHOUT special TRADE AGREEMENTS (stimulated by UNILATERAL policies only).
# MILITARY HARDWARE. Arms and munitions supply of different kind form the SECOND large commodity group enjoying the possibility to cross the AmericanCanadian border in BOTH directions DUTYFREE.
Since the 1960s, a complete ARMS' PRODUCTION SHARING PROGRAM of the two countries is in force guaranteeing Canadian industry profitable CONTRACTS with American government and SUBCONTRACTING relations with leading American producers in this strategic field.
However, all these opportunities concern mostly AMERICA'S OWN military production located BOTH in the USA and Canada. Maybe, only in COMMUNICATION field there are NATIONAL Canadian firms capable of making practical use of this arrangement. As for the EMPLOYMENT for the Canadian workers, here the effect of the ARMS' PRODUCTION SHARING PROGRAM is rather substantial.
# AUTOMOTIVE PRODUCTS. For many years since 1965, up to ONETHIRD (and MORE!) of commodity trade between the United States and Canada is consisted of "automotive products" new motor cars and trucks, components and parts for the automobile production, tires and other rubber components, etc.
The Automobile Agreement (also called the "AutoPact") is a permanent BILATERAL interstate SECTORAL arrangement providing FREE TRADE conditions for material supply and general functioning of the NORTH AMERICAN AUTOMOTIVE INDUSTRY (including SALES of FINISHED PRODUCTS motor cars and trucks within North America).
There does NOT exist anything like "American automobile industry" or "Canadian automobile industry". There is only INTEGRATED AUTOMOBILE (AUTOMOTIVE) INDUSTRY of the TWO countries which before long will FULLY INTEGRATE also the THIRD component "Mexican automobile industry".
This is a classical and colorful example of DIRECTLY INTERNATIONAL PRODUCTION. For a long time, the THREE leading automotive firms of North American continent (in fact – THREE American TNC) have controlled over 90% of combined automobile output of the TWO countries. All three have created GIANT NETWORKS of material supply securing the production of their COMPLEX FINISHED PRODUCTS – motor cars. These networks include MANY THOUSANDS of individual producers and suppliers (contractors and subcontractors) in different countries of the world (but mostly in North America itself).
# TWO of them General Motors and Ford Motor have ASSEMBLY PLANTS in the United States and massively import assemblies, parts and accessories from Canada (and Mexico)
# The THIRD Chrysler Corporation produces finished cars in Canada in its plants situated across the Michigan Lake and also has a widespread geography of supply. Since 1998, as a result of the biggest INTERNATIONAL MERGER in the history of the AUTOMOBILE INDUSTRY, the control over Chrysler passed (as it turned out, only for a while) into the hands of the European automotive giant DaimlerBenz (accordingly, a new name has been chosen DaimlerChrysler).
There are close TECHNOLOGYbased TIES between AMERICAN and CANADIAN links of each of the major producers. These INTRAfirm systems of TECHNOLOGICAL division of labor, with addition of THOUSANDS of independent suppliers working on the SUBCONTRACTING basis, secure relatively HIGH EFFICIENCY and ECONOMY OF SCALE. Practically, only in this way American automobile manufacturers could prevent loss of North American market to Japanese and European firms.
However, in recent decades, the North American automobile industry has been represented NOT only by the aforementioned American "BIG THREE" but by some "foreign newcomers" including Toyota and Honda (which have assembly plants in the United States) as well as Nissan (with production facilities in Mexico). One of the bestselling models on North American market was developed and produced by the American plants of Honda. Accordingly, the TECHNOLOGICAL DIVISION OF LABOR in North American carmaking more and more often exceeds the limits of the CONTINENT and takes GLOBAL character.
Finally, let us mention one more, virtually quite UNUSUAL, even UNIQUE, feature of the Automobile Agreement (AutoPact). As a matter of fact, during more than 30 years of its functioning NO special intergovernment body to supervise the implementation of the agreement has been created!
* Generally, the AutoPact was VERY successful for BOTH sides. Canada developed a steady surplus in its automotive trade, the American "Big Three" managed to improve their efficiency and to secure reasonable competitiveness.
On this basis, in the mid1980s, further liberalization initiatives concerning different NEW industrial SECTORS have been developed. A series of CanadianAmerican NEGOTIATIONS have taken place concerning introduction of DUTYFREE arrangements for BILATERAL trade in petrochemicals, furniture, nonferrous metals, alcoholic beverages, etc.
But the time was ripe for something BIGGER. Both the R. Reagan administration in America and the government of B. Mulroney in Canada (which was in power since 1984) were ready and willing to work out a COMPREHENSIVE (allembracing) FREE TRADE ARRANGEMENT to be signed by the TWO countries, with possibility of WIDENING its membership in the future. The spreading of idea of "North American CONTINENTALISM" in the public opinion of both countries at that time also was of much help.
* Strong "CONTINENTALIST" feelings in North America were connected with strengthening of positions BOTH of Europe and Japan in GLOBAL COMPETITION.
In the mid1980s, over THREEQUARTERS of all Canadian trade was directed to the U.S. Not to lose this fatty share in the coming years was a difficult task for Canada, asking for resolute measures in securing FREE APPROACH to American market.
So, after a brief period of active BILATERAL negotiations, a FREE TRADE ARRANGEMENT was worked out in 1986, and set into force as from 1989.
It has received official name of the "Canada U.S. Free Trade Agreement" (CUFTA) and was aimed at:
# gradual ABOLITION of ALL customs tariffs (duties) in the BILATERAL trade within 10 years, i.e., not later than by 1999, with THREE different regimes for the THREE groups of products: 1) at once and fully, 2) 5 cuts in the level of duties of 20% each, 3) 10 cuts of 10% each,
# ABOLITION of major NONTARIFF BARRIERS to the reciprocal trade, like import quotas and export subsidies, and CREATION of conditions for truly FREE MOVEMENT of goods and capital,
# INTRODUCTION of a FREE investment and trade REGIME in the SERVICE SECTOR of the two countries (FIRST arrangement of this kind in the WORLD),
# CREATION of a DISPUTE SETTLEMENT mechanism between them,
# GUARANTEED APPROACH to the Canadian oil and other energy and raw material resources for the American side (especially important point for the United States, which had much trouble with "National Energy Program" of Canada and other manifestations of the DIRIGIST and NATIONALIST ("PROCANADIST") tendencies in Canada's economic policy, like introduction in 1974 of the Foreign Investment Revision Agency FIRA).
So, the CUFTA was set into force with HIGH expectations for the expansion of BILATERAL (reciprocal, mutual) trade and creation of NEW JOBS both in the United States and in Canada. It actually has made a considerable contribution to the development of regional trade and the fight against unemployment.
* In 1990, the then new Mexican president C. Salinas (elected 1988, now in exile) expressed the country's wish to start negotiations about its participation in the regional FREE TRADE arrangements. It meant a strong move away from the traditional Mexican "ECONOMIC NATIONALISM", and a logical development of the reforming process which started under Salinas and brought some success in fighting the galloping inflation and in the reprivatization of the huge state sector.
As an important historical precondition for the Mexico's further involvement into the North American INTEGRATION, we can regard the widespread phenomenon of the socalled "MAQUILADORAS" (or "MAQUILAS") which first appeared in 1965 and underwent strong development after 1980.
In the economic theory, "MAQUILADORA" means a Mexican plant (firm), which works on the SUBCONTRACTING basis to supply an American company with automotive (automobile) components and parts and enjoys the regime of a "free trade zone", i.e., may import materials and components from the United States and export its own products to U.S. market on a DUTYFREE basis.
This arrangement became possible because of the changes in the American and Mexican legislation back in 1965 aimed at servicing the development of INTERNATIONAL PRODUCTION CHAINS on the basis of the TECHNOLOGICAL division of labor (the DIRECTLY INTERNATIONAL PRODUCTION mentioned earlier).
Since 1980, the majority of maquilas were transformed into PERMANENT INDUSTRIAL BASES manufacturing capitalintensive and laborintensive products (CAPITAL came from the United States and LABOR was made very CHEAP by devaluating the Mexican peso). In the 1990s, the LABOR COST of production in Mexico has been estimated at $2,30 PER HOUR, as against more than $14 in Canada (even in Taiwan it has been higher $3,50).
The Mexican government decree of 1989 encouraged the process of further "MAQUILADORIZATION" of the country. It recognized maquiladora investment as "the principal means of inserting the Mexican economy into the global world economy". The Northern part of the country was transformed to a big "FREE TRADE ZONE".
So, it is only logical that after such a massive preparation Mexico was ready to enter negotiations with the United States and Canada about North American FREE TRADE AREA. It is also worthwhile to mention that over 70% of the Mexican exports are directed to America (almost the same proportion as in Canadian case).
* As a result of all these developments, in October 1992 the THREE countries – the USA, Canada and Mexico – signed the North American Free Trade Agreement (NAFTA). It has been successfully RATIFIED by Canadian and Mexican parliaments, and by the House of Representatives of American Congress.
Actually, major CHANGES brought by NAFTA (in comparison with CUFTA) concern mostly Mexican side, i.e., the American and Canadian relations with this country.
The NAFTA provides for TWO major INTEGRATION steps:
ABOLITION of ALL tradeandinvestment BARRIERS between the THREE countries within the next 15 years,
INTRODUCTION by all THREE countries of analogous (similar) LEGISLATION regulating ECOLOGY STANDARDS and LABOR RELATIONS.
In particular spheres, the LIBERALIZATION of TRADE and CAPITAL movement should take place according to a "common timetable":
# AGRICULTURE. The majority of tariffs are abolished at once; only for corn, sugar, some fruits and vegetables the duties must be put away in 15 years,
# AUTOMOTIVE PRODUCTS. Tariffs had to disappear GRADUALLY within 10 years,
# TEXTILES. The barriers had to go GRADUALLY within 10 years (this concession applies to the textiles "made in North America" ONLY so, it can NOT help China or Taiwan to penetrate regional market through different "tricks"),
# FINANCIAL SECTOR. Mexico had to fully open this sphere for the American and Canadian investment not later than by 2007 (unfortunately, after deep monetary crisis in Mexico in 1995, which ended in nearcollapse of the peso as a sound international currency, the prospects have NOT looked so good any more),
# TRANSPORTATION. The conditions of FREE CARGO TRANSIT should have been achieved by the year 2000 (another integration issue creating strong friction between the countries, because Mexican longdistance trucks are now regarded both in the United States and in Canada as a deadly threat to the natural environment, i.e., as strong ecological hazard).
In principle, the introduction of the NAFTA gave impetus to INTRAregional TRADE and EMPLOYMENT. Thus, the TRADE among the THREE members of NAFTA reached $435 billion in 1996. Since spring 1997, Mexico has become America's export market No. 2, immediately after Canada (No. 1) and before Japan (which figured as No. 3 only, and as of late has been even pushed into the slot No. 4 by China). Trade with Canada and Mexico accounts for ONETHIRD of the U.S. total, up from ONEQUARTER in 1989. Nowadays, Canada sells more to the state of California alone than to the European Union, Norway, South Korea, China and Hong Kong combined. In all sectors, during the 1990s, the U.S. economy added 8.9 million jobs – an achievement hardly possible without NAFTA.
As for Mexico, it was expected to increase its worldwide EXPORTS to a record $110 billion in 1997. Since the 1995 peso crisis, 1.5 million JOBS have been created. Mexico has become more attractive place for FOREIGN DIRECT INVESTMENT, which totaled $31.5 billion in 199496, an amount second only to China among developing countries. In the past, exports originated from the border region and the largest cities, while today, most exportoriented plants are opening outside the border area and throughout Mexico.
Obviously, the NAFTA marketplace increases opportunities for strategic alliances in production, distribution and technology. It creates FRIENDLY CLIMATE for international (regional) business of small and mediumsize companies which get better access to advanced technology and production processes.
Still, many believe that NAFTA did NOT quite live up to the expectations, especially in the United States. There are estimates showing that the U.S. has actually LOST some WORKING PLACES in its manufacturing to "southern competitor” – Mexico. In the American Congress, since 1996 there has been a strong MOVEMENT headed by the Republicans demanding a thorough investigation of the consequences of NAFTA and a revision of American position, should the results turn out negatively.
* Yet, since the 1990s, a quite NEW PERIOD in the history of North American INTEGRATION has begun – the period of ALLREGIONAL FREE TRADE ARRANGEMENTS.
Accordingly, the "INTEGRATION MODEL" of the North American economic region is undergoing some changes.
# During the FIRST period, ending in 1989, the "NORTH AMERICAN INTEGRATION MODEL" had following specific features:
in the absence of barriers to capital migration, the INTEGRATION PROCESSES developed mostly on the MICRO and MESOlevel, i.e., through the activities of PRIVATE FIRMS and their foreign direct investment ("initiative from below"),
very LITTLE initiative and activity on the INTERGOVERNMENT level (MACROlevel), practically NO regional organs or institutions (NO signs of POSITIVE integration)
MANY remaining obstacles to TRADE; conditions of FREE TRADE AREA type concerning only THREE (albeit important) groups of industrial products.
# Since then, with the CUFTA and NAFTA, major CHANGES to this MODEL have been taking place:
now, the initiative also comes "from above",
however, the impetus in the INTERGOVERNMENT activity of the THREE countries is being made on NEGATIVE integration, i.e., on the abolition of various TRADE BARRIERS and the creation of FREE TRADE conditions, as well as on further LIBERALIZATION of CAPITAL migration (mostly into Mexico).
* For comparison, the "EUROPEAN INTEGRATION MODEL" (based on the experience of the EU) is characterized by:
LEADING ROLE of the activity on the MACROlevel, i.e., INTERGOVERNMENT decisions and agreements ("initiative from above" prevailed from the very beginning),
processes on the MICRO and MESOlevel followed the changes in the situation brought about by the decisions on the MACROlevel, i.e., by JOINT intergovernment actions (from the Treaty of Rome to the Treaty of Lisbon),
strong impetus on POSITIVE integration (creation of joint SUPRAnational instruments of regulation, like the European Commission or the CAP, EMS, etc.),
forces in favor of further DEEPENING the INTEGRATION are very strong, the development goes toward ever HIGHER forms of the INTEGRATION SYSTEM – with the ECONOMIC AND MONETARY UNION as the current major step – a big difference in comparison with FREE TRADE AREA conditions being created now within North America.
However, both "MODELS" of REGIONAL ECONOMIC INTEGRATION lead to rather SIMILAR RESULTS. For example, according to MAJOR CRITERION of success of the INTEGRATION PROCESSES – the GRADE of the INTERLACING (INTERDEPENDENCE) of the national economies WITHIN the region – both Europe and North America clearly stand out against the BACKGROUND of the rest of the world.
*Another important FEATURE that European integration and (North and South) American integration have IN COMMON is the prospect of their WIDENING:
by now, the European Union has become the "EUROPEAN TWENTYEIGHT" instead of “EUROPEAN FIFTEEN” with a prospect of further expansion in the future,
in the Western Hemisphere, the North American regional TRADE arrangement (NAFTA) has been already expanded on Chile for all practical purposes, and some other Latin American countries have good chances to join it sooner or later.
Thus, there are grounds to expect that NAFTA signifies not the END, but rather the BEGINNING of the formation of a vast INTEGRATION SYSTEM on the scale of the whole of Western Hemisphere.
We can mention a series of BILATERAL agreements between the United States and Latin American and Caribbean nations arranged more than a decade ago by President George Bush and representing the socalled "Enterprise for the Americas Initiative" (EAI), which has been aimed at creating sometime in the 21st century a kind of "AMERICAN COMMUNITY" something along the lines of the British "Commonwealth of Nations".
In December 1994, President Clinton hosted the FIRST in history Summit of the Americas in Miami where high representatives of more than dozen states pledged (expressed their willingness) to achieve a Free Trade Area of the Americas (FTAA) by the year 2005.
In March 1998, the SECOND Summit of the Americas gathered in Santiago, Chile. This time, 34 countries with population of about 750 million people have been represented by their HEADS OF STATE and adopted a concrete TIMETABLE which is designed to put the FTAA in place by 2005 as agreed in Miami.
* However, there was a FACTOR that made the goal of practically implementing the allAmerican FREE TRADE idea on time rather problematic. The matter was that, since 1995, President Clinton found himself in a difficult and unpleasant situation when he did NOT possess the socalled "FASTTRACK NEGOTIATING AUTHORITY" (i.e., American Congress did NOT renew his right to take PERSONAL INITIATIVE in signing international agreements which could be later confirmed by a simple Congressional ratification procedure).
Two recent examples show clearly what it means. For some years, the question of Chile's membership in NAFTA could NOT be resolved exactly because American president did NOT possess "fasttrack authority". Also, it was a great disappointment for Clinton, and – even more important – for his partners from Latin America, when, in April 1998, he came to the HEMISPHERIC SUMMIT in Santiago WITHOUT real negotiating power.
It was in view of this situation that Canada, which has a big INVESTMENT STAKE in Chile and growing TRADE with this country, has taken the liberty of signing, in November 1996, a bilateral FREE TRADE AGREEMENT with Chile without waiting for a general solution in a NAFTA context. Soon, Mexico followed suit, while the U.S. made its own free trade arrangement with Chile in 2003 only.
Since 2001 in power, U.S. President George W. Bush at once proclaimed his strong backing to the idea of the FTAA. However, just like his predecessor, he was feeling RESTRAINTS because of the ABSENCE of the fasttrack trade negotiations power and repeatedly urged Congress to grant it him.
Finally, in December 2001, the House of Representatives passed the bill restoring to U.S. President broad authority to negotiate and sign international trade agreements, now renamed “trade promotion authority” or TPA. Unfortunately for the U.S. and its new Democratic President, this authority has expired on July 1, 2007.
However, before the TPA has been introduced, in April 2001, the THIRD Summit of the Americas has gathered in Quebec, Canada. The leaders of 34 Western Hemisphere nations confirmed their ambitious plan to create the world’s largest free trade area by 2005. The Quebec summit added to the FTAA plan a “democracy clause” that could strip a country of membership if it ceased to be a democracy (and become something like Cuba), for example – as a result of a military coup.
To finish with this question, it is worthwhile to notice that President Obama will face the same problem of obtaining and keeping the TPA sooner or later.
* By the winter 2003/2004, in the Western Hemisphere the mood prevailed that the FTAA plan would not be realized according to the schedule, i.e., before January 1, 2005. So, some bilateral (intersubregional) initiatives have been developing, mostly with the participation of the U.S. trade representatives.
For example, in December 2003 – January 2004, in Washington, negotiations between the United States, on the one side, and some Central American nations (Guatemala, Nicaragua, El Salvador, Costa Rica, Honduras, and The Dominican Republic), on the other side, have been arranged with an aim of signing their own subregional FREE TRADE agreement. Actually the Central American Free Trade Agreement (CAFTA) has been signed in May 2004. At approximately same time, also FREE TRADE negotiations between the United States and a group of South American countries (including Panama, Colombia, Ecuador, Peru and Bolivia) have been launched with the same aim – to introduce more narrow FREE TRADE arrangements in the absence of the allembracing hemispherical FTAA.
* The bilateral free trade arrangements have gained even more importance after “singularly unproductive” FOURTH Summit of the Americas which has gathered in Mar de Plata, Argentina in November 2005. Leaders from around the Americas failed again to resolve key differences over how to create a hemispherewide FTA and could not even have agreed on the date of the next tour of negotiations.
In this connection, TWO important new factors should be considered.
FIRST – there is a strong LEFTIST political movement with pronounced AntiAmerican flavor on the scale of all of Latin America – headed by Cuba and Venezuela and including such different players as Brazil, on the “rich” side, and Bolivia and Nicaragua, on the “poor” side.
SECOND – since late 2008, the world entered a period of overwhelming FINANCIAL AND ECONOMIC CRISIS, which has radically changed the current political agenda in the majority of countries. On this unfavorable background the plans of further trade liberalization have been “put on the back burner” both in global framework (represented by the WTO) and on the scale of individual regions (like Central and South America).
* Generally, the examples of Europe and North America allow an important THEORETICAL conclusion: that REGIONAL framework is nowadays OPTIMAL for the economic development.
Actually:
NATIONAL framework (national economy) is obviously by far TOO NARROW for efficient production systems and economy of scale to emerge,
GLOBALIZATION has been taking place, yet in many cases the WORLDWIDE scale is NOT very suitable either (our PLANET is simply TOO BIG for majority of PRIVATE FIRMS to practically master business operations on a truly GLOBAL scale),
so, obviously it is the REGIONAL framework that offers OPTIMAL conditions for achieving both HIGH efficiency and HIGH technological level of modern MANUFACTURING (this observation is also valid for the SERVICE SECTOR).
* However, relations between ECONOMIC REGIONS of the world, even between the remotest from each other, like EUROPE and LATIN AMERICA, or EUROPE and EAST ASIA, are rapidly developing taking different ORGANIZATIONAL FORMS, including those of a FREE TRADE AREA (FTA) type.
In June 1999, in Rio de Janeiro, at the FIRST ever Latin America European Union Summit, 46 heads of state agreed to begin preparative work on a wide REGIONTOREGION trade liberalization agreement (as the last stage of their economic cooperation project adopted in Madrid in December 1995).
In late1999, negotiations between the European Union and Mercosur (about this economic bloc we shall speak more in Topic 10) have begun. They have been aimed at preparing a transAtlantic deal by introducing a vast Europe Latin America free trade zone. Also, Mexico was in the process of mutual preparations for signing its own FREE TRADE agreements with the European Union and with Japan, to name but TWO bilateral trade liberalization initiatives the country has been involved in.
As for Asia Pacific superregion, INTEGRATION PROCESSES in its Western part (i.e., in East Asia, South East Asia and Oceania) and in its Eastern part (i.e., in North America, the Caribbean and South America) do "increasingly intersect and converge in membership", thus promising to create "an immense common economic space" in the next couple of decades (about this vast area the area of the APEC see more in Topic 9).
Here, it is worthwhile to mention the BILATERAL free trade negotiations between the U.S. and Australia, which developed simultaneously with the aforementioned U.S. trade liberalization initiatives in the Western Hemisphere and ended in May 2004 with the signing of a comprehensive agreement – the AUSFTA promising new opportunities for mutual trade in FACTORY GOODS (MANUFACTURES) but excluding SUGAR (a major Australian export commodity).
Topic 9. INTEGRATION PROCESSES IN ASIAPACIFIC REGION
In the 1990s, as never before, very MUCH has been written about the coming of a "PACIFIC CENTURY" ("Pacific Age"). Political and economic analysts coined this metaphoric name for our 21st century, i.e. for the FIRST century of the NEW Millennium which started with the year 2001.
This name was chosen by analogy with the "AMERICAN CENTURY" ("American Age") or, sometimes, "ATLANTIC CENTURY” – names often used to describe the 20th century (while the 19th century was called the "BRITISH CENTURY").
* But what is the "Pacific", or "Asia Pacific", or "AsiaPacific region" ("PacificAsian region"), or the "Pacific Basin"? Or what, for that matter, are the "Pacific Rim countries"?
Ever more often, ALL these names (geographical terms) are used as SYNONIMS – to describe a very wide and heterogeneous REGION (or, rather, SUPERREGION) of the world washed by the Pacific Ocean and stretching from Chukotka and Alaska in the north to Tierra del Fuego and New Zealand in the south, from Malaya in the west to California in the east.
It may be divided into TWO major parts:
# Western Pacific Rim ("Western Pacific") to which belong Pacific Asia (South East Asia plus East Asia), and Oceania,
# Eastern Pacific Rim ("Eastern Pacific") including North America, Central America and South America.
So, to the Western Pacific Rim countries belong:
Malaysia, Indonesia, Brunei, Thailand, Singapore, the Philippines (the socalled founding members of the Association of South East Asian Nations – ASEAN), and Vietnam, Laos, Myanmar and Cambodia – its new members (all – in SOUTH EAST ASIA),
China, Taiwan, Japan, Democratic People's Republic of Korea (DPRK, or "North Korea"), Republic of Korea (ROK, or "South Korea"), the Russian Eastern Siberia and the Russian Far East (in EAST ASIA).
Australia, New Zealand, and many islands of the Western Pacific (in OCEANIA).
To the Eastern Pacific Rim countries belong:
the United States (directly – Hawaii, Alaska and California), Canada (directly – British Columbia), Mexico, Guatemala, El Salvador, Nicaragua, Honduras and Panama (in NORTH AMERICA, including Central America).
Colombia, Ecuador, Peru, Chile, (directly), and other Latin American countries (indirectly) – in SOUTH AMERICA.
* Thus, to the "AsiaPacific region" ("Pacific Basin") belong – directly or indirectly – DOZENS of nations with various geographical and climatic conditions, with very DIFFERENT population (in size, origin, density, cultural traditions), very RICH and very POOR, with GIANT and POWERFUL modern economic complexes, and with WEAK underdeveloped agrarian economies.
However, very important is the fact of their GROWING INTERDEPENDENCE on the base of COMPLEMENTARITY of natural resources and human capacities, as well as in accordance with the UNIVERSAL tendency to INTERNATIONALIZATION of economic life (GLOBALIZATION) and with rapid REGIONALIZATION of the world economy.
Here, in this vast region, we still do NOT find a complete REGIONAL INTEGRATION SYSTEM, but its emerging ELEMENTS are quite evident, as well as INTEGRATION PROCESSES in different forms and between different regional partners.
* We shall start this time with processes on the MACROlevel, i.e., with manifestations of POLITICAL WILL of the countries boarding the Pacific from western and eastern side to achieve a kind of REGIONAL ACCORD concerning the issues of creating something like an "PACIFIC COMMUNITY" in the future.
First cautious proposal for an INSTITUTIONAL COUNTERWEIGHT to EC (EU) in the Pacific Basin was made by Japan in the 1960s, when Europe began to build economic strength. However, the idea of a SPECIAL TRADING REGIME for the Pacific held at that time LITTLE APPEAL for the rest of the region, including the U.S. So, the idea of a Japanese economics professor (Kiyoshi Kojima) had to wait for more appropriate times.
It had long been recognized that Asia's political and economic differences would, most probably, prevent the creation of an ECONOMIC BLOC similar to the European Union. Asian nations had grown accustomed to resolve their trade friction with the West BILATERALLY (countrytocountry), in a lowkey and inconspicuous way.
By the late 1980s, however, conditions had changed. In Europe, the "Common Market" (EC, EU) had demonstrated the potency of regional cooperation in both TRADECREATING and TRADERESTRICTING aspects.
Another factor conductive to PACIFIC REGIONALISM was the growing CONFIDENCE of Asian nations in their own ECONOMIC VALIDITY (importance). The mounting size of the total AsiaPacific economy, its increasing INTERDEPENDENCE, the lowering of political tension following the U.S. withdrawal from Vietnam, and the normalization of SinoAmerican diplomatic relations since 1972 – all served to create a more favorable atmosphere for cooperation in the 1980s.
In 1980, a pathbraking initiative began with the creation of a governmentsupported PRIVATE body, the Pacific Economic Cooperation Conference (PECC). However, the LOW level of enthusiasm in ASEAN for a more formal INSTITUTIONAL FRAMEWORK remained a major impediment (obstacle) to fruitful intergovernment dialogues.
* In early 1989, when the world public opinion was focused on the idea of the Single European Act (SEA) aimed at creating a Single European Market (SEM), the then Australian Prime Minister, Bob Hawke, striving to avoid economic isolation and to find counterbalance for the developments in Europe, proposed regional (Asia Pacific) negotiations with an aim of introducing an INTERGOVERNMENT FORUM and coined the now wellknown name for it – the "Asia Pacific Economic Cooperation"(APEC).
The United States and Canada showed their interest in the concept, and that, combined with support from several Asian nations, led to the eventual formation of a 12nation group comprising the then SIX countries of ASEAN (without Vietnam) plus Australia, Canada, Japan, South Korea, New Zealand, and the U.S.
Up to now, APEC mainly remains an ANNUAL FORUM – and NOT something like ASSOCIATION, COUNCIL or even COMMISSION (jokers say about APEC that it represents merely “four adjectives looking for a noun”). It is MORE a place to TALK (to express opinion) than to NEGOTIATE or to DECIDE. However, its ministeriallevel dialogues and the meetings of its lowerlevel working groups have been suggesting the beginning of a NEW PHASE in regional economic integration and institutionbuilding.
In 1991, the forum was enlarged as to include China, Hong Kong and Taiwan. At the Bogor SUMMIT (Indonesia, November 1994), 18 member nations took part, including Chile, Mexico, and Papua New Guinea (PNG), and a threeyear MORATORIUM on further expansion introduced.
After it expired, the last wave of APEC expansion took place in 1998, when THREE new members Russia, Peru and Vietnam – have been accepted, and a NEW tenyear MORATORIUM on widening of the membership introduced.
* It happened soon after the Tokyo SUMMIT of the "GREAT SEVEN" in July 1993, that a courageous INITIATIVE of Bill Clinton helped to solve in ONE BIG MOVE (OctoberDecember 1993) many complex questions of international relations both on BILATERAL (regional) and MULTILATERAL basis.
In October, the American Congress ratified the NAFTA agreement (should it have failed – and other important events would NOT have taken place either).
In November, the APECforum gathered in Seattle (USA). It was the FIRST TIME ever that the FORUM gathered at the HIGHEST level, i.e., as a SUMMIT meeting. In Seattle, the heads of the 14 Pacific countries (without Malaysia) outlined prospects for the future closer cooperation. Clinton used the opportunity to speak of "Tripolar World" and "Triple Play", having in mind UNDERSTANDING and COOPERATION between the THREE main regions of the world.
And in December, under impression of BOTH these great events, the representatives of more than hundred nations reached FINAL ACCORD in the "Uruguay Round" of the GATT negotiations (please, remember Topic 6).
* The HIGHLEVEL AmericanAsian dialogue opened in Seattle (November 1993) promised new developments in U.S. cooperation with Pacific Asia. At that historic FIRST gathering of the APEC leaders, President Clinton did NOT push Asian partners in the direction of a "Pacific Common Market" or even "Pacific Free Trade Area" (and many Asians were afraid, he would). It was clear that at that time Pacific Asian countries were NOT ready to open their markets on the basis of a comprehensive REGIONAL ARRANGEMENT.
Generally, Asian nations are more inclined to decide conditions in TRADE with different Western partners UNILATERALLY, or BILATERALLY – through negotiations with each particular country (including the United States). They also want to decide FOR THEMSELVES such issues as "Human Rights" ("Political Freedoms") or "Ecology Standards".
In principle, they favor a kind of "OPEN REGIONALISM" which would provide for closer ties within the region, but would NOT exclude normal, and even "special", relations with the states outside Pacific Basin.
In Seattle, it was solely decided that the analytic and preparative work should go on, and that in 1996 a new forum meeting should outline some GENERAL targets for instituting some kind of "PACIFIC COMMUNITY" in the future. Still, the first APEC summit "gave the LOOSE organization a BACKBONE".
* After Seattle, the process suddenly accelerated. Instead of 1996, the next, SECOND, gathering of the APEC leaders took place in November 1994, in Bogor (Indonesia).
The 18 countries adopted a joint declaration in which they (quite unexpected for many political observers) agreed to announce their commitment "to complete the achievement of our goal of FREE and OPENED TRADE and INVESTMENT in Asia Pacific not later than the year 2020". The declaration stated that this date concerns DEVELOPING countries only, while DEVELOPED and "NEWLY INDUSTRIALIZED" countries (NIC) should liberalize their economic turnover (i.e., FOREIGN TRADE and INVESTMENT) ten years earlier, by 2010.
Thus, the TRADE LIBERALIZATION scheme in AsiaPacific area provides for a kind of "TWOLANE TRAFFIC" based on different speeds with which the APEC nations belonging to TWO groups will move toward the FREE TRADE conditions.
The decisions adopted in Bogor can be regarded as a major BREAKTHROUGH in the field of TRADE LIBERALIZATION endeavor. The idea of a regional FREE TRADE AREA gained principal endorsement. Although NO accelerated TRADE LIBERALIZATION was expected, some "official timetable" had been set.
Since Bogor, the "buzz word" (modern slogan) characterizing actions aimed at boosting AsiaPacific cooperation is "FACILITATION" of commerce and investment through such joint measures as HARMONIZATION of customs clearance procedures and rules for entry of goods, as well as CONSULTATIONS before deciding where exactly new highways, ports and telecommunication links could best go.
* In November 1995, in Osaka, the THIRD session of the APEC SUMMIT took place and adopted an Action Agenda – a document frequently called "a BLUEPRINT for TRADE and INVESTMENT LIBERALIZATION", which should have served as a CONCRETE PROGRAM aimed at implementing the Bogor decisions.
The "THREE PILLARS" (main elements) of the future regional FREE TRADE arrangement include:
# trade and investment LIBERALIZATION (gradual abolition of all TARIFF and NONTARIFF barriers to international economic activity),
# trade and investment FACILITATION (creation of favorable conditions for the development of trade and investment among AsiaPacific nations),
# economic and technical COOPERATION (also called "DEVELOPMENT COOPERATION") in 13 "target areas" including TRAINING human resources, INDUSTRIAL science and technology, small and mediumsize ENTERPRISES, INFRASTRUCTURE, TRANSPORTATION, TELECOMMUNICATIONS, TOURISM, FISHERIES, AGRICULTURE.
And here are THREE highly original PRINCIPLES of the INTEGRATION MECHANISM:
> VOLUNTARYISM. The TRADE and INVESTMENT LIBERALIZATION should take place on the basis of the socalled "CONCERTED UNILATER APPROACH", when EACH nation undertakes ITS OWN liberalization measures VOLUNTARILY and at a pace (with a speed) corresponding to its abilities and current economic situation (i.e., WITHOUT firm obligations which should be fulfilled at any price).
> FLEXIBILITY. The LIBERALIZATION should be COMPREHENSIVE (i.e., should embrace ALL kinds of GOODS and SERVICES traded among the AsiaPacific nations), but its introduction should be FLEXIBLE (i.e., some countries MAY exempt some goods from the liberalization process for some time).
> OPENNESS. In accordance with the concept of "OPEN REGIONALISM", the LIBERALIZATION should be based on the principle of "NONDISCRIMINATION" (it means that ALL concessions the member countries will grant each other can also apply to partners outside AsiaPacific area).
Almost all decisions worked out in Bogor and Osaka have a common feature: a certain AMBIGUITY, certain VAGUENESS, allowing for FLEXIBILITY of the whole system and VOLUNTARY character of national liberalization measures.
It was expected that the unique mechanism of regional TRADE and INVESTMENT LIBERALIZATION created by APEC through its decisions at the Osaka summit would in fact reveal TOLERANCE toward relatively small contributions and lazy path of liberalization measures in the WEAKEST countries of this heterogeneous region for the sake of HARMONY and CERTAIN BALANCE of trading power between the TWO groups. In this light, the aforementioned VAGUENESS and AMBIGUITY of the whole arrangement could be regarded as its merit, and NOT weakness or flaw.
* The next, FOURTH, summit meeting of the APEC gathered in November 1996 in Subic Bay, a suburb of Manila, the Philippines' capital. It was LESS pathbreaking than Bogor, more in the nature of Osaka, with its stress on current goals of ECONOMIC COOPERATION and voluntary and unbinding contributions to the preparing comprehensive TRADE LIBERALIZATION in the next century.
In line with the Action Agenda adopted in Osaka, in Manila the member countries presented their individual ACTION PLANS for reducing TRADE and INVESTMENT BARRIERS and deregulation of their national economies as preparatory measures. All national plans were then integrated in Manila Action Plans for APEC (MAPA), a fourvolume document summingup individual and collective measures aimed at TRADE and INVESTMENT LIBERALIZATION.
*The FIFTH summit of APEC took place in November 1997, in Vancouver, British Columbia (Canada). In the way of preparation, almost all members submitted their LISTS of industrial SECTORS which should be put on the summit's agenda. During the meeting, NINE areas were chosen for the socalled Early Voluntary Sectorial Liberalization (EVSL): environmental goods and services, medical equipment, chemical products, energy goods and services, forest products, fish, toys, gems and jewelry, telecommunications. The idea of the EVSL is that such "sectorbysector" approach would make it EASIER to achieve progress in OPENING MARKETS in the APEC area before the year 2010.
However, for Japan at least TWO of the chosen NINE sectors can be regarded as highly "sensitive". Facing the Asian crisis and a very probable new round of MULTILATERAL TRADE NEGOTIATIONS under the aegis of the WTO, Japan was reluctant to hurry with opening its markets, especially those of FISH and FOREST PRODUCTS.
We have already mentioned that in Vancouver THREE new countries were granted the APEC membership: Russia, Peru and Vietnam. Thus, since 1998 the APEC has 21 members, and a tenyear MORATORIUM on further expansion of the organization has been introduced.
* In November 1998, high statesmen from these 21 nations (however, with Vice President Al Gore instead of Bill Clinton, and with then Prime Minister Yevgeny Primakov instead of ailing Boris Yeltsin) came to Kuala Lumpur for the SIXTH summit of APEC. At this time the situation in the HOST COUNTRY (Malaysia) has been very tense because of economic hardships and a deep split in country's political establishment which culminated in the arrest and trial of Vice Prime Minister Anwar Ibrahim (he was released from jail only in 2004). Also, during several months before the Kuala Lumpur meeting the U.S. tried to persuade Japan to participate in the EVSL measures in all NINE sectors, including fish and forestry products. Japan did NOT agree, and the MINISTERIAL MEETING which gathered on the eve of the SUMMIT decided to transfer the TRADE LIBERALIZATION negotiations to the WTO. All in all, NO serious steps in Pacific cooperation have been made this time, besides adopting a modest set of proposals to battle Asian economic crisis.
* In September 1999, the heads of APEC states gathered, for the SEVENTH time, in Auckland (New Zealand). This time, the month of November was kept free for the WTO session due in Seattle, which was expected to become really historic by opening a NEW ROUND of multilateral negotiations about further trade liberalization (if necessary, return to Topic 6).
All in all, the Auckland summit did little to push forward APEC own agenda of trade liberalization, while concentrating attention on working out common grounds for the expected November WTO negotiations (which, as we know, have ended in a deadlock).
* The next, already EIGHTH, summit meeting of the APEC gathered in November 2000 in the capital of BRUNEI Bandar Seri Begwan.
Obviously lacking new initiatives in enhancing regional cooperation, the 21 member countries focused their attention on promoting a NEW ROUND of multilateral trade negotiations in the WTO framework (which has been later opened in Doha). However, while the DEVELOPED countries headed by the U.S. advocated an immediate opening of a new round, the DEVELOPING countries led by Malaysia insisted on first seeing and discussing the AGENDA for an eventual round, and only after that setting the opening date or a definite deadline.
The BRUNEI summit ended in COMPROMISE by acknowledging the CONCERNS of the poor nations, while also giving the rich countries the DEADLINE (until the end of 2001) they wanted. The APEC statement also urged early WTO entry for China, which has already negotiated the conditions of its joining the WTO with the U.S, the EU and all other major countries except Mexico. Also the issue of eventual APEC membership for North Korea has been discussed in favorable terms (albeit earlier APEC introduced a MORATORIUM on new membership until the year 2007), as well as the prospects of Taiwan’s and Russia’s WTO entry in a near future .
* The next APEC summit (No. 9), in November 2001 in SHANGHAI, gathered in a very unusual international situation which developed in the aftermath of the horrible TERRORIST ATTACK on New York and Washington on September 11, 2001. The U.S. Air Force, with some British backing, was dropping bombs on Taliban positions and terrorist training camps in Afghanistan. The ANTITERRORIST COALITION was a vast and representative one, but its members had many worries and reservations concerning the U.S. military operation.
So, the attention of the summit switched to the issues of INTERNATIONAL TERRORISM. First time in the APEC history, a FINAL DECLARATION containing a JOINT FOREIGN POLICY STATEMENT has been signed by the high representatives who were present.
In the ECONOMIC field, the summit reaffirmed the members’ commitment to FREE and OPEN trade and investment, and thus to Bogor goals and Osaka timetable. Also, partners expressed their determination to REVERSE the economic DOWNTURN by fighting protectionism and launching the NEW ROUND of the WTO negotiations at its ministerial conference in November 2001.
* In 2002, the regular TENTH summit has gathered in lateOctober, in LOS CABOS, Mexico. Unfortunately, it took place immediately after several unusually severe TERRORIST ATTACKS, including the bombing of dancing facilities in Bali, Indonesia, and the hostage drama in Moscow. So, for the second consecutive year, POLITICAL QUESTIONS dominated the summit’s agenda. The summit issued two STATEMENTS on TERRORISM and another urging North Korea to abandon its nuclear arms development. Economic documents (rather general and vague in phrasing) confirmed APEC members’ intentions to promote sustainable economic growth in the AsiaPacific region through liberalization and facilitation of TRADE and INVESTMENT, as well as economic and technical COOPERATION. The summit agreed that the new Doha Round of multilateral trade negotiations should be concluded by January 1, 2005.
* In 2003, the ELEVENTH summit of the APEC has gathered in October in BANGKOK, Thailand. Again, POLITICAL ISSUES and GOALS dominated the Summit’s agenda. In the joint communique the 21 APEC leaders called for a REVIVAL of the stalled TRADE TALKS in the WTO and for new efforts to accelerate the FIGHT against TERRORISM.
* Next year (2004), the current TWELVE summit has taken place in Santiago, Chile. Before the session, The APEC Business Advisory Council issued a report urging the leaders of the 21 countries to display “strong political commitment” to successfully negotiate a regionwide FREE TRADE ARRANGEMENT (along the lines of the Bogor goals but with some adjustments). Instead, the heads of the APEC states preferred to pay their main attention to the ongoing Doha Round of the WTO and to ignore the necessity to concentrate on the regional free trade agenda.
* In major features, this situation has repeated itself in Busan, Korea, where the APEC leaders gathered in November 2005 on their THIRTEENTH session. Again, the necessity to somehow finalize the Doha Round as soon as possible dominated the discussions preventing any concrete decisions in the regional framework. Also, the “spaghetti bowl” of bilateral FTA AGREEMENTS with widely differing rules and standards made it even MORE difficult for the APEC members to move toward an effective regional arrangement. Besides, topical political issues like fighting CORRUPRION and working out necessary COUNTERTERRORISM measures took a big place on the sessions’ agenda.
* Judging by almost all APEC meetings after the 9/11 2001 events, including the recent ones – in Vietnam, 2006, in Australia, 2007, in Perui, 2008, in Singapore (2009) and Yokohama (2010), it looked like the FOCUS on SECURITY ISSUES began to steadily distract APEC from the regional TRADE LIBERALIZATION and ECONOMIC REFORMS that are so essential for the region’s future.
As for the very last summits they have been, quite expectedly, devoted mostly to the issues of the current GLOBAL FINANCIAL CRISIS. The proclaimed goals include such farreaching and ambitious ideas as “designing a new economic model” for the world and “rising the quality of growth” in the region.
So, the current problem for APEC is how to become and stay more POLITICALLY and ECONOMICALLY RELEVANT (i.e., to be of real IMPORTANCE in the world affairs) without too strongly POLITICIZING the AGENDA of its annual SUMMITS.
* Let us see now what was going on in the last few decades on the MICRO and MESOlevels of REGIONAL ECONOMY. We shall analyze THREE major issues concerning INTERNATIONALIZATION processes on the regional (AsianPacific) scale:
MOVEMENT OF CAPITAL,
TECHNOLOGY TRANSFER,
MUTUAL (INTRAREGIONAL) TRADE.
# CAPITAL. In the middle of the 1980s, American dollar lost over HALF of its VALUE against the yen as a result of special monetary policy developed by the industrial countries – PARTNERS and RIVALS of Japan on the world markets (the socalled "Plaza Accord" among the "Group of Seven"). This policy was aimed at fighting the giant Japanese TRADE SURPLUS, but in practice it stimulated FOREIGN DIRECT INVESTMENT of Japan more, than it restricted its EXPORTS.
With a strong yen, Japanese companies suddenly found themselves confronting PRODUCTION COSTS at home that were FAR HIGHER than those in the NIC. So, in order to remain competitive, the Japanese producers moved rapidly to locate NEW PRODUCTION offshore (in neighboring countries with relatively LOW labor costs). In FIVE years, Japanese DIRECT INVESTMENT in the NIC and Southeast Asia increased SIX fold – with the objective NOT just to enlarge MARKET SHARE within each hostcountry, but to use the location as an EXPORT PLATFORM in trade with the socalled "THIRD COUNTRIES", such as the United States, which absorbed about 30 percent of the Japanese OFFSHORE production.
Throughout the region, the tide of investment became visible in the form of new Japanese offices, hotels and manufacturing plants. Consumer products from Sony, Panasonic and Canon began to appear in Korea and Thailand NOT as imported items, but as locally produced goods.
In Japan itself, public worry emerged about its DEINDUSTRIALIZATION, or the socalled "HOLLOWINGOUT" of Japanese MANUFACTURING allegedly gaining momentum and undermining domestic growth potential and employment opportunities in the coming decades. In our view, there is NOT enough ground for such pessimistic allegations (judgement) which can be even misleading, because the rise of Japanese OFFSHORE PRODUCTION brings about an absolute enlargement, and NOT a shrinking, of Japanesecontrolled MANUFACTURING ACTIVITIES at home and around East Asia.
The most farreaching change has been taking place in the REGIONAL PRODUCTION BASE itself: Japanese companies began to manufacture COMPONENTS in different parts of Pacific Asia according to each country's COMPARATIVE ADVANTAGES in RESOURCES, INFRASTRUCTURE and LABOR – a quite new stage in the formation of DIRECTLY INTERNATIONAL PRODUCTION under Japanese guidance which acquired MASSSCALE character.
However, so far it is NOT Asia that represents the MAIN outlet (direction) for the Japanese investment abroad in terms of ACCUMULATED capital: for example, in the mid90s, about THREEFIFTH (60 percent) of all CUMULATIVE direct investments have been still placed in North America and Europe as compared to merely 23.6 percent in Asia (please, notice that in 1985 this share amounted to 11.8 percent only). Among reasons for such a state of affairs we can point out that during the last TWOTHREE DECADES the creation of Japanese AUTOMOBILE and ELECTRONICS production in the United States and acquisition of big stakes in American REAL ESTATE were under way.
At the same time, Japan itself remains rather CLOSED for foreign capital. There is a scandalous IMBALANCE in the sphere of FOREIGN DIRECT INVESTMENT (FDI) between Japan and the rest of the industrial world. For example, at the turn of the century/millennium, Thailand received 34 times MORE inward investment than Japan. The FDI in Japan has been only 1/1.000th of that in the U.S., and 1/500th of that in China or Britain. Foreigners only account for 0.1 percent of TOTAL direct investment in Japan, compared with 4 percent in France, 7 percent in the U.S. and 13 percent in Britain .
Overcoming ISOLATION of Japan's financial markets and securing their OPENING for foreign investment have been the two main objective necessities behind the government's "BIG BANG" deregulation plan introduced in 1997 and aimed at liberalizing Japan's financial sphere by 2001 (an ambitious goal achieved only in part).
As for American capital, its main destinations in East Asia included China (by far the biggest share), Taiwan, Korea and the ASEAN. The scale of American FDI in China was such that a new quality of interaction between the two world’s industrial leaders has emerged – that of “economic twinning”, a new form of international economic integration. China, in its turn, has been investing a lot in the U.S., as well as in South East Asia (according to ASEAN Plus Three model).
# TECHNOLOGY. The Japanese DIRECT INVESTMENT in Pacific Asia served as a major channel of its TECHNOLOGY TRANSFER within the region. "Investments NOT aid" was the motto (slogan).
However, the NIC, while benefiting from the surge of Japanese investment, could enhance their COMPETITIVE position against JAPANBASED production ONLY in the LOWER technology areas of consumer markets. Japan continues to reserve the MOST ADVANCED technologies for its HOMEBASED industries.
In our view, there is MUCH MORE ground to speak about further TECHNOLOGICAL MODERNIZATION of Japan's MANUFACTURING than of its "HOLLOWINGOUT".
The MOST SOPHISTICATED computer semiconductor chips are produced at JAPANESE factories (at home) about a year EARLIER, than their appearance in the Japanese plants ABROAD (including the United States and Germany). This STRATEGY suggests that the Japanese firms will be careful NEVER to allow its FOREIGN manufacturing to undermine the technology lead of their HOMEBASED production. Korea has gained a share of the semiconductor market, for example, but IMMENSE SCALE of Japanese investment in new product development and R&D has been dwarfing that of Korea or ANY other Asian country. Thus, the TECHNOLOGICAL GAP between Japan and the states which are going through modernization of their economies with Japanese and American help will most probably stay for decades to come.
It would be wrong to say presume the Japanese (or American) financial and technical ASSISTANCE to Asian countries is of NO use to them. However, it has by far LESS influence on Asia's industrial development than the inflow of FDI which is expressed in figures exceeding those for the INTERNATIONAL AID as 10 : 1.
Let us also notice that the OVERALL SCALE on which BOTH Japan' DIRECT INVESTMENT in Asia and its BILATERAL AID to the Asian countries take place visibly EXCEEDS that of the United States (in the latter case by about TWOFOLD). Japan has already become the dominant FOREIGN ECONOMIC POWER in three of the ASEAN countries (Indonesia, Malaysia and Thailand), and is approximately on a par with the U.S. TRADE, AID and INVESTMENT presence in the Philippines.
# TRADE. The today's WEALTH of many countries in PACIFIC ASIA emerged thanks to relative OPENNESS of Western markets after "Tokyo Round" of the GATT negotiations. That explains WHY, in their OVERALL trade, the turnover with partners OUTSIDE this group (i.e., with INDUSTRIAL partners in America and Europe) has historically played a very BIG role (about 70 to 60 percent).
However, during the last decades, a substantial switch (change) has taken place. The MODERNIZATION of Asian economy accompanied by visible growth of PRODUCTION COOPERATION ties, on the one hand, and growing WEALTH favoring modern CONSUMPTION and DEMAND patterns, on the other hand, brought about a sharp RISE in INTRAregional (Asian) trade and some DECLINE of the OUTSIDE (Western) partners' share in TOTAL Asian trade.
In 1994, JAPAN already placed within ASIA (practically – within East Asia) up to 38 percent of its INTERNATIONAL TRADE (against 27 percent in 1985) – almost as much as in the U.S. and Europe combined. And overall, in 1996, "Pacific trade" accounted for 74 percent of Japan's exports (305 billion) and about 68 percent of its imports (almost 236 billion); it consisted mostly of manufactured products and resulted in visible TRADE SURPLUS (about $70 billion, and HALF of it in trade with the US). This trend is still intact.
For the UNITED STATES, in the mid1990s, the share of "Pacific partners" in its overall exportimport activities amounted to 66 percent ($884 billion), and without Canada – about 46 percent (also a rather HIGH indicator indeed). Nowadays, China and Japan are the main trading partners of the U.S. outside North America.
As for ASEAN countries, Hong Kong, Taiwan or South Korea, ALL of them were actively developing their neighborly Asian ties. As a result, the RELATIVE IMPORTANCE of partners in Asia was GROWING, and the ROLE of trade with North America was DECLINING. The INTRAAsian trade, as a proportion of TOTAL Asian trade, has risen from an already HIGH mark of 47 percent in 1990 to 53 percent in 1995. It became by far greater than Asia's turnover with either the U.S., or the EU, or North America and Europe combined.
Anyway, MUTUAL TRADE in AsiaPacific region is BIG by ANY standards, and there is MUCH to expect of it in the future. Unfortunately, sometimes such expectations based on MUTUAL INTERDEPENDENCE of Asian nations can also promise TROUBLE, like it has been in 1998 when FINANCIAL and ECONOMIC crisis in Korea, Indonesia, Thailand, etc., together with CHRONIC STAGNATION in Japan itself, undermined the DEMAND on Asian markets.
However, in the long run, issues of TRADE LIBERALIZATION (on the global scale – through the WTO, on a regional basis – through the APEC, on subregional level – through the ASEAN, or between Australia and New Zealand (within CER), and on a narrow bilateral basis – through a “spaghetti bowl” of FTA) will draw special attention of the countries of this vast and dynamic area.
* Now it’s time to stress the GIANT SCALE on which the 21 economies of today's APEC members around the Pacific Rim are represented in the world economy. Altogether, the APEC countries have over 2.2 billion people (over ONETHIRD of world's population). They account for about 45 percent of all INTERNATIONAL TRADE and for HALF of the total WORLD PRODUCTION of goods and services.
So, there is pretty much ECONOMIC POWER collected in the Asia Pacific region.
We can make a conclusion of historic importance:
Europe, and even Atlantic region as a whole, CANNOT be regarded as the DOMINATING FORCE in the world affairs any more.
# CHINA alone has more than 1.3 billion people. It is regarded as "world's biggest nation and fastest growing economy". By 1995, China probably QUADRUPLED its 1978level ECONOMIC OUTPUT. For TWO DECADES, the average ANNUAL growth of the Chinese ECONOMY (GDP) has been around 10 percent. According to some estimates, China has already become SECOND in the world by the size of its GDP and may build the ABSOLUTELY BIGGEST ECONOMY within 20 years.
As from July 1997, China has taken over from under the British colonial rule the "Pearl of the Orient” – Hong Kong, which has been for over two decades moving upward and managed to create a percapita income of more than $25 thousand for each of its 6 million people. The world has wondered if the "ONE COUNTRY, TWO SYSTEMS" principle will work. So far, it does. In the meantime, Hong Kong shares with Singapore the FIRSTSECOND position in the world as the country (territory) with the FREEST market conditions and the BEST investment climate.
At the end of the 20th century, the 15th congress of the ruling Chinese Communist Party integrated the ideas of its late paramount leader Deng Xiaoping into party documents. It was declared that the economic REFORMING and MODERNIZATION will go on, bringing about further ADVANTAGES of market economy including higher efficiency of production through the spread of PRIVATIZATION. As for 1000 1500 plants which are expected to remain in the hands and under control of the state organs (the socalled “stateowned enterprises”, or SOE), they should undergo deep restructuring and reorganization.
Thus, it has been expected that the ECONOMIC REFORMING and RESTRUCTURING would probably go on – first under interested supervision of the then Prime Minister Zhu Rongji, and from spring 2003, under the current “China’s No. 2” – Wen Jiabao, a person standing close to the NEW political leader – Hu Jintao.
As for POLITICAL REFORMING, hardly much could (and still can) be expected from the very specific variant of Chinese political evolution, which promises little besides COSMETIC CHANGES and a smooth PASSAGE OF POWER from one generation of Communist rulers to the other (which in itself is NOT SO LITTLE an achievement indeed!). It is worthwhile to remember that Hu Jintao had been elected the CCP General Secretary at the 16th Party Congress in November 2002 and later has become also the official head of state (President) at the national People’s Congress in March 2003, while the previous “great leader” Jiang Zemin stepped down keeping – albeit for a while only – the last of his three previous posts – that of the chairman of the state Central Military Commission CMC).
It is advisable to keep in mind that – at least, until lately the MAIN FORCES within APEC, its "locomotives" (or "motors") which brought the region (and the whole of world economy, actually!) into motion, have been the UNITED STATES and JAPAN not China or India (or Korea, for that matter).
However, since 2003, it has been exactly China that accounted not less than for 16 percent of growth in the world economy, giving it an impact second only to that of the United States (while the impact of Japan has been truly negligible, i.e., very small indeed). So, maybe it is already possible to state that during the last decades modern China has been rapidly becoming something like a NEW global economic “motor”.
On the other side, since 2008, the visible deterioration in the state of the REAL SECTOR of American ECONOMY, as well as an obvious deep CRISIS in its FINANCIAL SYSTEM, have been giving ground to describe the U.S. as a “sick giant” of the world and the main source of the coming MAJOR DIFFICULTIES in the system of international economic relations.
# Despite all the signs of growing weakness, JAPAN until lately remained the world's SECOND BIGGEST economy in absolute terms and one of the MOST PRODUCTIVE if we take into account the size of its population. In the second half of the 20th century, for many decades it has had the HIGHEST growth rate, the LOWEST rates of inflation and unemployment and the LARGEST external trade surplus from ALL developed nations.
However, it is universally acknowledged that the country has entered the new Millennium in a state of a deep ECONOMIC STAGNATION threatening to degenerate into a SLUMP, and badly needed ECONOMIC REFORMING. Its main directions should be ECONOMIC DEREGULATION, and (internationally) radical dismantling of INVISIBLE TRADE BARRIERS through modernizing its very peculiar DISTRIBUTION SYSTEM and easing GOVERNMENT PROCUREMENT policies discriminating against foreign suppliers (the aforementioned "BIG BANG" program in the FINANCIAL sphere has been intended as the FIRST series of radical steps toward BUSINESS LIBERALIZATION).
In the last three decades, Japan has been rapidly building up its OFFSHORE production base. Traditionally, Japan is HIGHLY dependent on the RAW MATERIALS SUPPLY from all around the world, but mostly from Western Pacific countries. It also has "sophisticated demand" pattern – thus potentially representing GOOD MARKET for other advanced nations (if only the market itself would be more OPEN!).
Japan's relations with the "FIRST GENERATION" of the New Industrial Countries (Korea, Taiwan, Hong Kong and Singapore) have been developing under strong influence of GROWING COMPETITION between them in the HIGHTECH sector. However, this group of countries also represents Japan's major INDUSTRIAL BASE outside Japan, and the relations are generally FRIENDLY, with strong element of COOPERATION. It has been clearly shown in the course of Asian crisis. ASEAN forms the SECOND (still emerging) OFFSHORE INDUSTRIAL BASE of Japan skillfully coordinated with its DOMESTIC MANUFACTURING. However, there have been POLITICAL TENSIONS in Japan’s relations with ASEAN member states, because the "PANASIAN" feelings there (especially in Malaysia) have been so far much stronger than the "PANPACIFIC", and at times it created difficulties. However, as of late, we can observe a NEW trend toward signing bilateral FREE TRADE AGREEMENTS between Japan and several individual members of the ASEAN (which we shall discuss later).
Of major importance for Japan are, of course, its relations with China. This giant nation, forming a world for itself, is quite rich in NATURAL RESOURCES. It has plenty of CHEAP but very EFFICIENT LABOR and represents a very potent MARKET with rather modern STRUCTURE of DEMAND (in comparison with ASEAN, for example). Since 1978, Japan has been INVESTING in Chinese economy on a regular basis.
Generally good (or at least normal) political relations have been also of paramount importance for BOTH sides – a benefit practically LOST during the last decade characterized by growing tension in Japan’s relations with China and South Korea and by mounting territorial disputes with each of them.
The most critical POLITICAL ISSUES in the SinoJapanese relations remain: a) the question of Taiwan's official recognition (the PRC still nourishes the idea of "One China" and demands from its political and economic partners to join this approach); b) the updated U.S.Japan security alliance; c) the idea of Japan's participation in the socalled "theater missile defense" (TMD) developed by the U.S., d) the territorial dispute around the Senkaku Islands, and – last but not least! – e) radically different attitudes of both countries to HISTORICAL issues, especially those concerning the origin and events of the WW II.
Japan is also interested in creating a NEW INDUSTRIAL BASE in Latin America using HIGH GRADE economic complementarity of their natural resources and rich reserves of CHEAP LABOR there. AS of late, more than ONESEVENTH of Japan's FOREIGN DIRECT INVESTMENT has been already placed in South America.
Japan's relations with the United States remain of paramount importance. There are plenty of CONTRADICTIONS between the two Great Powers, mostly in the ECONOMIC field – concerning the necessity "TO OPEN" the Japanese market, the giant U.S. TRADE DEFICIT in commerce with Japan, etc. However, the POLITICAL ALLIANCE between them stays FIRM, and this is very important when China is rapidly building up its economic and military potential while the "wild card" of North Korea is still in play.
# The United States of America remains the MAIN INDUSTRIAL POWER of the world (about ONEQUARTER of world's GNP), and for the last two decades there have been signs that it is going through a kind of a POSTINDUSTRIAL REVOLUTION (active development of TELECOMMUNICATIONS NETWORKS, splendid state of its R&D, rapid PRODUCTIVITY growth, emergence of NEW worldclass products, including motor cars, STOCK MARKET typically riding high, etc.). We can say about the U.S. industrials: "Good teachers good students!" And, of course, the United States looks nowadays like the one and only SUPERPOWER, actually. It plays the role of a major PEACEKEEPING force in Asia and the world, while after the events of 9/11 it has also become the main ANTITERRORIST watchdog worldwide.
A report prepared by the Japan's Ministry of International Trade and Industry (MITI, now METI, from Ministry of Economy, Trade and Industry) stated that in 1995 the United States OUTPERFORMED Japan (was AHEAD of it) in PRODUCTIVITY characterizing 13 of 19 major SECTORS of ECONOMY. Those 13 sectors with higher U.S. productivity were: TELECOMMUNICATIONS (where American productivity was more than TWICE as high as in Japan), METAL SMELTING, TRANSPORTATION, FOOD, MACHINERY, CLOTHING, PRECISION INSTRUMENTS, AGRICULTUREFORESTRYFISHERY, METAL PRODUCTS, POWER SUPPLY, PULP AND PAPER, ELECTRIC MACHINERY and SERVICES. According to the report, Japan has been AHEAD of the U.S. only in FOUR sectors – most of all in AUTOS and CHEMICALS.
The "Pacific State" of the U.S. – California – alone represents an economic power comparable with whole nationstates and even regions (unofficially, as of 20002001, it has been the “world's No. 6” economy). In the last TWO decades, California created MORE new jobs than ALL of Western Europe combined.
Obviously, relations WITHIN America and the Western Hemisphere still have the HIGHEST PRIORITY for the United States. We have already discussed the events in North America connected with INTEGRATION and the NAFTA. Here, it is worthwhile to stress once more the obvious intention of the United States to MOVE SOUTH, spreading NEW ARRANGEMENTS on Latin America (please, remember the material of Topic 8).
Main economic expectations and concerns in American relations with China are connected with further development of BILATERAL TRADE (though aggravated by a giant American DEFICI T – which goes into hundreds of billions), as well as with opportunities offered by the regime of FREE ECONOMIC ZONES established by Chinese government in the coastal regions of the country.
And one of the big financial problems on the current agenda, aside of the chronic problem of the dollartoyuan exchange rate (the yuan is believed to be scandalously undervalued), is created by the very LOOSE interpretation in China of INTELLECTUAL PROPERTY RIGHTS. It breads the socalled "PIRATE PRODUCTION" of software, CD's, video cassettes, etc., entailing big LOSSES for American businesses in ROYALTIES and FEES and bringing FRICTION into bilateral relations.
In the last decade, American "economic stake" in Asia has grown dramatically. The public (and government) opinion in the U.S. is in favor of granting Asia a much "HIGHER PROFILE" than ever before. Generally, the American policy in the South East Asia is CONSTRUCTIVE and has a strong FINANCIAL BACKING. In its turn, ASEAN needs American presence in the region – as a kind of counterweight to powerful policies of Japan and especially of China.
# ASEAN. With Singapore and the FOUR "ASIAN DRAGONS" belonging to the "SECOND GENERATION" of NIC as its CORE, the ASEAN embraces now all TEN nationstates of South East Asia. The SIX founding members of the ASEAN (Indonesia, Malaysia, Thailand, Philippines, Singapore and Brunei) are bringing further their INDUSTRIALIZATION/MODERNIZATION with strong technological and financial BACKING from Japan and the U.S, and in their turn render assistance to the ASEAN new members – Vietnam, Laos, Myanmar (Burma) and Cambodia. They have some common INTERESTS, and are gradually working out their own collective IDENTITY, as well as gathering EXPERIENCE in subregional political and economic COOPERATION.
Although MUTUAL TRADE inside ASEAN takes only about 5% of the overall trade turnover of the group, the member countries have been working on a subregional FREE TRADE ARRANGEMENT of their own the ASEAN Free Trade Area (AFTA) since 1993. The final aim of the AFTA was the abolition of ALL customs tariffs in MUTUAL trade by the year 2010 for the SIX original members, and by the year 2015 – by the FOUR new members. Such have been the current deadlines adopted by the ASEAN Manila summit in November 1999. By now, the AFTA is more or less in place, though the GLOBAL FINANCIAL CRISIS created many aggravating factors on the path to its implementation.
* It is also worthwhile to notice that the ASEAN serves as a "gravitation center" for a much wider circle of nations in Asia and the Western Pacific (and in the APEC area as a whole).
For example, Malaysia, backed by some other ASEAN nations, has been for several years propagating creation of the socalled East Asia Economic Caucus (EAEC), another subregional organization aimed at promoting mutual economic cooperation in this part of the world. It is worthwhile to notice that, from the very beginning, the EAEC was intended to be "For Asians Only", i.e., NOT to include such close neighbors as Australia and New Zealand.
In March 1996, the EAEC practically made its "TAKEOFF" during the AsiaEurope Meeting (ASEM) in Bangkok. However, since the year 2000, the EAEC more often than not figures in the press under a NEW name ASEAN + 3 (or: ASEAN Plus Three), a practically NEW group which emerged on the sidelines of the aforementioned ASEAN Manila summit and includes high officials of the same TEN members of ASEAN plus Japan, China and South Korea. In the years to follow, China in particular has taken major steps to establish “STRATEGIC PARTNERSHIPS” with individual ASEAN countries, starting with Indonesia.
As a political establishment, the ASEAN + 3 has obviously to compete with the ASEAN Regional Forum (ARF), which has been originally established in 1994 to serve as a kind of OPEN TRIBUNE for wide international discussions of eventual MULTILATERAL security arrangements in Asia Pacific.
Not only does the ARF embrace all countries of South East Asia and Indochina (like the ASEAN) as well as China, Japan and Korea (like the EAEC or the ASEAN Plus Three) but it also includes Russia and the U.S., Australia and New Zealand, India and Canada; even the European Union is represented in its political talks which more and more outgrow the regional framework.
The ASEAN + 3 summit in Kuala Lumpur in December 2005, very important in itself, can also be regarded as a new beginning in relationship between East Asia and its immediate neighbors – South Asia and Oceania. Although dubbed the East Asia Summit, the meeting practically defined “East Asia” in POLITICAL rather than in GEOGRAPHICAL terms – a big step forward, actually. India in particular played a major role in the discussions pushing for INTEGRATION – with an aim of eventually creating the world’s biggest FREE TRADE AREA of nearly 3 billion people – an East Asia Community of sorts (though something quite different from the European Union, for example). The meeting adopted in principle the CONCEPT of the East Asia Community and even took the decision to draft the new group’s first CONSTITUTION, a document that could enshrine HUMAN RIGHTS and DEMOCRACY in a region where both have traditionally come under critical scrutiny.
So, nowadays a concept of ASEAN + 6 (ASEAN Plus Six), embracing also India, Australia and New Zealand, has been coined and gains popularity parallel with more traditional concept of ASEAN + 3 (ASEAN Plus Three).
# VIETNAM now also belongs to ASEAN (since 1995), and is, in geographical terms, a typically "Asia Pacific" country. It represents a TRANSITIONAL SOCIETY with good prospects of becoming a welldeveloped MARKET ECONOMY in the same league with "ASIAN TIGERS". Something like the "Vietnamese miracle" on the base of the socalled "DOI MOI" reform program is in the making – the fact that can NOT be ignored by partners in the Pacific cooperation.
# TAIWAN, with its GIANT foreign exchange reserves, is one of the world's financial centers and a major industrial financier in the Pacific region. It has become one of the most important links in Japanese OFFSHORE PRODUCTION system characterized by HIGH efficiency and LOW production costs. However, its life "in the shadow" of mighty China is burdened by the necessity to build up military power and to look for reliable allies against eventual invasion.
# SOUTH KOREA (the REPUBLIC OF KOREA) has grown accustomed to be regarded as an extremely COMPETITIVE and DYNAMIC economy with a MODERN industrial structure. Although organizational principles on which Korean "Big Business", the socalled "CHAEBOL", is built can be regarded as rather obsolete (oldfashioned) and too strongly influenced by the STATE, it rendered effective as far as COSTS and QUALITY are concerned.
However, between mid1997 and mid1999, Korea has been living in the grip of a strong ECONOMIC and MONETARY CRISIS relying on IMF "RESCUE PACKAGES" and Japan's financial backing (while Japan has been struggling against ECONOMIC SLUMP of her own). Of course, this painful period in the economic history of South Korea has long passed. And still and yet, we may ask, what lies in store for the country?
In our opinion, TWO eventual SCENARIOS concerning the Korean Peninsula can be considered.
FIRST: Should, sooner or later, a kind of UNIFICATION (amalgamation) process between South Korea (ROK) and North Korea (DPRK) begin and successfully develop, a new economic SUPERPOWER could emerge in the region (analysts speak of something like "Germany of the East").
SECOND: In the opposite case, i.e., if Korean peninsula would remain DIVIDED and if the DPRK would follow its aggressive and perilous path as before, the matters of regional SECURITY would grow in importance and become a NEW focal point of the world attention giving impetus to regional POLITICAL and MILITARY COOPERATION in view of the deadly DANGER for the whole mankind.
During the first years of the new MILLENNIUM, however, some NEW signs have been appearing that the preferable FIRST alternative (from the TWO aforementioned) still has BETTER chances to become a reality, albeit not very soon indeed.
# RUSSIA assumed APEC membership at this forum's Vancouver session in November 1997. Hence, Russia is officially recognized as a "Pacific Rim country" and its NATURAL RESOURCES base (the BIGGEST and RICHEST in the world) as well as SCIENCE and TECHNOLOGY experience, HUMAN potential and growing MARKET should be regarded as important factors in further development of Pacific relations. Although, by the year 1999, Russia's share in world's GNP has fallen to miserable 1.5 percent, since then economic growth has resumed and its average annual rate for a decade has amounted to something around 7 percent (unfortunately, nowadays it has been falling again).
In Japan's relations with Russia, the issue of the "Northern Territories" still represents major OBSTACLE. Yet, both countries are "DOOMED TO COOPERATION” –because of unique COMPLEMENTARITY of their natural and human resources, production and market STRUCTURES. There is much ground for developing a widespread system of TECHNOLOGICAL DIVISION OF LABOR involving Russian Siberia and the Far East, on the one side, and Japan, on the other side, in the next future. Russian OIL and GAS resources, in particular, can and should play a major role in securing Japan’s needs in ENERGY and FUEL imports in the 21st century.
As of late, Russia has been playing a growing role in energy supply of other Pacific Rim countries – China, Korea, Japan and partly – also of the Pacific U.S. states. However, so far this phenomenon can be described in terms of conventional TRADE only (albeit in many cases proceeding on the base of longterm contracts) and NOT as real OUTSOURCING (or mature INDUSTRIAL COOPERATION).
# CANADA and AUSTRALIA are among the most richly endowed countries of the world in regard to NATURAL RESOURCES (most of all – MINERAL deposits), and they managed to collect big financial strength and purchasing power.
Japan's economic relations with these socalled "white dominions" are developing on the basis of TECHNOLOGICAL DIVISION OF LABOR. There is clearly expressed COMPLEMENTARITY between industrial structures of Japan and its overseas partners. Both countries form and important outside RAW MATERIAL BASE for the Japanese INDUSTRY, and represent interesting MARKETS with a consumption structure capable to absorb many Japanese HIGHTECH products (the socalled "sophisticated demand").
* To make the picture of developments in the Pacific region more complete, we should mention the AustraliaNew Zealand FREE TRADE ARRANGEMENT based on a series of BILATERAL agreements, which can be summed up under an official common title "Closer Economic Relations" (CER).
For over 40 years, these two countries have been enjoying FREE REGIME in their BILATERAL TRADE. There is already something like a SINGLE LABOR MARKET which embraces both Australia and New Zealand, and a SINGLE CAPITAL MARKET has been emerging rapidly. There do also exist projects (albeit hardly for the nearest future) of harmonizing their LEGISLATIVE BASE in such vital fields as BUSINESS RELATIONS and TAXATION, and even of introducing a COMMON CURRENCY.
Thus, a kind of narrow ECONOMIC BLOC (actually, of the EU type) does exist here on a subregional basis, close to Asia, but NOT quite Asian (in political spirit, this arrangement resembles more the Commonwealth of Nations than the ASEAN). As a matter of fact, Australia and New Zealand are very close to each other, so that even some kind of POLITICAL AMALGAMATION of the two countries sometime in the new century cannot principally be excluded.
Both these countries do NOT belong to Asia, but are feeling closely related to it. So, one of the big issues in the future will consist in finding an optimal "modus vivendi" (a system of coexistence and cooperation) between the ASEAN, on the one hand, and the CER (i.e., Australia and New Zealand), on the other hand. In 2005, major breakthroughs in Australia’s relations with Asia have taken place during the Prime Minister John Howard’s visits to Japan and China and during aforementioned East Asia Summit in Kuala Lumpur.
* In the Eastern Pacific, in the subregion of Latin America and the Caribbean, Mexico is of major importance (as a full member of the NAFTA) and Chile stands out as a new “economic powerhouse”. Today, they both are firstrate industrial partners both for the U.S. and Canada in North America and for Japan and China in East Asia. On the other hand, Venezuela and Nicaragua have been demonstrating strong antiAmerican and antiWestern attitudes and can hardly be regarded as reliable and muchpromising economic partners.
* It so happened that East Asia stays practically the ONLY ONE major economic region of the world which lives WITHOUT its own FREE TRADE AREA or any other REGIONAL integration arrangement (as distinct from worldwide MULTILATERAL trade and investment LIBERALIZATION system in the framework of the WTO, or the Asia Pacific FTA project adopted by the APEC summit in Bogor in 1994).
"Along with China, South Korea and Taiwan, Japan is the only major economy left behind today," N. Hatakeyama, chairman of the Japan External Trade Organization, formerly the nation's top trade negotiator, noted as early as 1999. So, since then, several proposals for FREER TRADE and TIGHTER COOPERATION in East Asian region (and/or in Northeast Asian subregion) have been floated by different organization and discussed in the press. For example, in February 1999, a senior Japanese trade official has informed the press that Japan was studying the idea of a FREETRADE agreement with South Korea.
In December 1999, Japan agreed with Singapore to launch a joint study on a bilateral free trade pact – the very FIRST practical move of this kind by Japan, which has long advocated a MULTILATERAL approach to TRADE LIBERALIZATION. The prolonged FTA negotiations between Japan and Singapore have been successfully completed at the end of 2001. Under the agreement, about 94 percent of bilateral trade between the new FTA partners would be freed from tariffs, covering more than 3,800 items (with the exception of some AGRICULTURAL products, TEXTILES and PETROCHEMICALS). On top of tariff reductions, the FTA includes the LIBERALIZATION of INVESTMENT and SERVICES, the HARMONIZATION of COMPETITION POLICY and a MUTUAL RECOGNITION agreement.
Let us also not forget about the FIRST EVER tripartite KoreanChineseJapanese summit meeting taken place on the sidelines of the aforementioned ASEAN summit in Manila (November 1999). There, the heads of the THREE Northeast Asian Nations discussed such topical issues as an eventual establishment of an Asian Monetary Fund (an idea first floated during Asian crisis in 1997, albeit without success) or of a Northeast Asia Regional Security Dialogue which may entail a larger grouping – including the United States and Australia.
And exactly one year later, on the sidelines of a meeting in Singapore of the “ASEAN PlusThree” group, the leaders of Japan, China and South Korea agreed that their countries should hold toplevel TRILATERAL meetings on regular basis.
By the end of 2000, a new wordcombination – “MINILATERAL PACTS” – emerged in the political lexicon to describe subregional arrangements of different kind existing or being negotiated between small groups of AsiaPacific countries. Such “MINILATERALISM” is regarded as an ALTERNATIVE to the aforementioned APEC “OPEN REGIONALISM” policies (which are acceptable in “good times” but hardly work in not so favorable situations, like the current GLOBAL FINANCIAL AND ECONOMIC CRISIS, as the most striking example).
In November 2001, the then Chinese Premier Zhu Rongji and Southeast Asian leaders agreed in principle to set up between them what they called “the world’s largest free trade zone” – a bold FTA project which would take over 10 years. At the same meeting in Brunei, leaders of China, Japan and South Korea held a separate “key dialog” on closer mutual integration, as well as on enhancing economic cooperation between them, on the one side, and their ASEAN partners, on the other side. At the same time, the China ASEAN FTA initiative represented a strong move in the keen rivalry between the Asia’s two great economic powers – China and Japan, giving the latter an impetus to act likewise.
By the end of the first decade of the 21st century, Japan has been simultaneously engaged in FTA talks with a lot of countries and their groups (for example, with the ASEAN as a whole its diplomatic answer to the Chinese ASEAN initiative). It has successfully finalized its FTA negotiations with the Philippines (in 2004), and Malaysia (in 2005), and has been going on with negotiations with Thailand and Indonesia, as well as with South Korea (since 2003), with Australia (since 2005) and even with faraway “lonely wolf” of Europe Switzerland (since 2005).
In its turn, Singapore signed an FTA accord with Australia (in February 2003), has opened FTA negotiations with India, and concluded an agreement with the United States (resembling those between the U.S. and Jordan and Israel). And South Korea has been engaged in FREE TRADE PACT negotiations with the U.S. (since 2006). New current information on different TRADE and INVESTMENT liberalization initiatives encompassing East Asian nations appears almost weekly, not to say daily.
*However, the analysis of the current trend toward TRADE and INVESTMENT LOBERALIZATION in the Asia Pacific superregion would be incomplete without mentioning one more important initiative.
The TransPacific Partnership (TPP) is a proposed regional FREE TRADE AGREEMENT that is currently being negotiated by twelve countries throughout the Asia Pacific (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam). The agreement began in 2005 as the TransPacific Strategic Partnership Agreement (TPSEP or P4). Member countries set the goal of wrapping up negotiations in 2012, but contentious issues such as agriculture, intellectual property, services and investments have caused negotiations to continue into the present, with the last round set to meet in Ottawa from July 3 to July 12, 2014. Passage of the TPP is one of the primary goals of the Obama administration’s trade agenda.
The TPP intends to enhance trade and investment among the partner countries, promote innovation, economic growth and development, and support the creation and retention of jobs. Global health professionals, internet freedom activists, environmentalists, organized labor, advocacy groups, and elected officials have criticized and protested the negotiations, in large part because of the proceedings' secrecy, the agreement's expansive scope, and controversial clauses in drafts leaked publicly.
According to some observers, PPT has a hidden antiChinese and antiRussian coloring and aims at consolidating the westernstyle democracies for eventual ideological and political confrontations concerning the future of the AsiaPacific region.
Topic 10. TRANSITIONAL SOCIETIES I: DEVELOPING WORLD
* It is worthwhile to remind you that, FORTY years ago, what we are now calling "DEVELOPING WORLD" was known under the name "OVERSEAS TERRITORIES", or "COLONIAL PERIPHERY", or simply "COLONIES" (belonging to and controlled by European "METROPOLIS").
However, THIRTY, even TWENTY, years ago, the term "THIRD WORLD" was very much in fashion. For over HALF a century, the GLOBAL political and economic DIVISION was based on the historic CONFRONTATION of the TWO social SYSTEMS "CAPITALISM" vs. "SOCIALISM". They formed the "FIRST WORLD" and the "SECOND WORLD", respectively, while the REST of the world, an eclectic conglomerate of economically UNDERDEVELOPED countries, was put together under the heading the "THIRD WORLD". Of course, this term can be used now as well, but recent radical changes in GLOBAL SITUATION rob it of real meaning.
So, the terms "DEVELOPING WORLD" and "DEVELOPING COUNTRIES" can be recommended before all others. They fairly well describe the group of mostly very YOUNG nationstates in Asia, Africa and Latin America which emerged as a result of the DECOLONIZATION process actively unfolding after the World War II.
* Historically and logically, it was COLONIALISM that preceded DECOLONIZATION. As political and economic phenomenon, COLONIALISM is dated from about 1500, whereby various emerging European nations discovered, conquered, settled and exploited large areas of the world.
It was Portugal that led the way of discovery and COLONIZATION (for example, Vasco da Gama was first who brought to Europe spices from India). Spain followed suit, and such people as Columbus and Magellan brought the NEW WORLD (both Americas) within European reach (but Spain itself, paradoxically, managed to keep very little of its overseas gains). In the early 16th century, Holland became the leading European naval and commercial power, with an Oriental empire that developed rapidly after chartering the Dutch East India Company in 1602 and the founding of Batavia (now Jakarta) on Java.
France settled in many places around the world, mostly across the Mediterranean Sea, in Africa. However, the most rich and widespread empire was built up by the Great Britain ("The sun never sets on the British Empire", as the saying goes). Its remnants exist till now in peculiar political form of the Commonwealth of Nations.
The 19th and early 20th centuries saw NEW expansionist powers emerge: Germany, the United States, Belgium, Italy, Russia and Japan. Colonial wars were fought, and the WHOLE WORLD was divided between small number of leading colonial powers. Resources from overseas played major role in INDUSTRIALIZATION and further development of their economies (remember Topic 2 of the course).
After the World War II, the COLONIAL EMPIRES began to rapidly collapse (tumble down), and by the 1960s the DECOLONIZATION became a worldwide and highly accelerated movement. Colonial India was the FIRST to get POLITICAL INDEPENDENCE – way back in 1947, and to immediately DISINTEGRATE into Hinduist India and Moslem Pakistan.
Great Britain, in particular, set about disassembling its empire. France's decolonization process was less peaceful at the start, but later an acceptable "modus vivendi" ("way of life") with former colonies has been found. Germany, Italy and Japan lost their colonial positions in the world war. In the 1950s70s, Belgium, Portugal and the Netherlands all divested themselves from their overseas possessions. The United States integrated Hawaii and associated Puerto Rico. Russia lost its colonial periphery in the 1980s and 1990s, when the former Soviet Union disintegrated into 15 more or less independent nationstates.
The DECOLONIZATION took place mostly under the aegis of the United Nations Organization (UNO, or UN). The anticolonial movement reached the high point in 1960 when UN General Assembly adopted the Declaration on the Granting of Independence to Colonial Countries and Peoples. 1964 was called the "Africa Year" when about 20 colonies on the Black Continent cast off the colonial yoke.
Thus, the period of COLONIZATION and COLONIAL EMPIRES was over. Practically ALL colonial nations used their newly acquired right of SELFDETERMINATION to proclaim POLITICAL INDEPENDENCE and their own STATEHOOD.
From the 1960s, the MOVEMENT for ECONOMIC INDEPENDENCE set the process of ECONOMIC DECOLONIZATION into motion. And in about TWO decades, the phenomenon of the socalled "NEOCOLONIALISM" (understood as a SET OF POLICIES used by the former METROPOLIS and aimed at keeping its, at least ECONOMIC, positions in former COLONIES intact) has also become a thing of the past.
A giant Developing World emerged – with its POVERTY and OVERPOPULATION, with its want of INDUSTRIAL GROWTH, and with acute SOCIAL and ECONOMIC PROBLEMS.
*However, WHAT exactly is Developing World? To understand this, let us get acquainted with some GROUPINGS of countries used by international organizations.
For example, the IMF experts divided the world into FOUR major GROUPS:
# DEVELOPED nations – about ONEFIFTH of world's population and far over 70% of world's economic output, i.e., of the sum of all countries' GNI (GDP) put together; this group includes the United States, Canada, the European Union, Australia and New Zealand, Japan, and some others;
# TRANSITIONING societies – the former Soviet Union plus other European "Socialist" countries, with 7 percent of world's population and about 8 percent of world's output (a sharp fall in comparison with the 1988 when their share in the output was estimated at around 16 percent);
# DEVELOPING countries – with PER CAPITA production ABOVE $500 and up to $3,000 – 4,000, representing roughly TWOFIFTH of world's population, but less than ONEFIFTH of world's output; here we find, among over a hundred and fifty others, such populous nations as China and Indonesia;
# UNDEVELOPED countries – with PER CAPITA production in the last decades of the XX century LESS than $500 representing roughly ONETHIRD of world's population, but only 2 percent of its output; in this group are over 50 countries, including India, Pakistan, Bangladesh, and most of Africa.
So, in this topic, under the term "DEVELOPING WORLD", we shall place the last TWO groups the socalled "DEVELOPING" (also "lessdeveloped" or “underdeveloped”) countries, and the "UNDEVELOPED" (or "leastdeveloped") countries.
Because the majority of the aforementioned TRANSITIONING SOCIETIES are also economically UNDERDEVELOPED and thus in acute need of further INDUSTRIALIZATION, we can make the following sad conclusion: if we divide all the countries into TWO large groups the “POOR” and the “RICH” than roughly 80 percent of the world population turn out to live in countries which can be characterized as POOR (all together they produce about 20 percent of world's OUTPUT), and only 20 percent are citizens of really RICH countries which account for 80 percent of world's production and wealth!
* The modern world is very HETEROGENEOUS, i.e., it consists of nations with VERY DIVERSE economic and social characteristics. For example, the achieved levels of ECONOMIC OUTPUT measured in terms of PER CAPITA Gross National INCOME (GNI) and PER CAPITA Gross Domestic Product (GDP) differ strongly as we move from REGION to REGION, from one GROUP of COUNTRIES to another. Please, pay full attention to PER CAPITA GNI figures calculated by the World Bank using the TWO modern methods – the socalled Atlas method and the PPP method (we shall speak about PPP a little later) – which you will find in the Table 1.10.1, because these INDICATORS form the MAIN CRITERION in evaluating a country's DEVELOPMENT LEVEL.
* The GROUPING of 208 countries of the MODERN WORLD according to their PER CAPITA GNI was undertaken by special research panel at the World Bank and published in World Development Indicators 2005, the latest full edition of the World Bank's flagship statistical publication.
To divide the countries into THREE main GROUPS the following "cutoff" principle has been used:
LOWINCOME economies, with PER CAPITA GNP $825 or less in 2004 (59 economies),
MIDDLEINCOME economies, with 2004 PER CAPITA GNP from $826 to $10,065 (94 economies with an average PER CAPITA GNI of $2,190),
HIGHINCOME economies, with 2004 PER CAPITA GNP of $10,066 or more (79 economies).
However, among MIDDLEINCOME economies, a further division, at PER CAPITA GNP $3,255, was made between:
LOWERmiddleincome economies ($826 $3,255) – 54 economies, and
UPPERmiddleincome economies ($3,256 $10,065) – 40 economies.
As for the average PER CAPITA GNI of the whole world in 2004, it was estimated at $6,280 by the Atlas method and at $8,760 by the PPP method
* Now, let us return to the Table 1.10.1 and also attentively look at the LIST of COUNTRIES belonging to each of the INCOME GROUPS (List 1.10.2), beginning with the world's POOREST, as well as at the LIST of DEVELOPING COUNTRIES grouped by REGION (List 1.10.3).
# LOWINCOME economies. So, the 59 world's POOREST and economically WEAKEST countries with population over 2.3 billion and PER CAPITA GNI of less than $826 form this group. The average PER CAPITA income in this group has been estimated at $510 – or at about 8 percent of the world average. The majority of these countries are so far BELOW the level of even typical DEVELOPING COUNTRIES that their ability to develop at all is in doubt.
While more Asian PEOPLE live in UNDEVELOPED ("leastdeveloped") economies than people from any other continent (in particular, because India, Pakistan and Bangladesh belong to this group), 36 of the 59 such COUNTRIES are in Africa.
The SubSaharan Africa (48 countries with average PER CAPITA income of about $600 for each of its almost 720 million people) is so POOR in resources of ANY kind and so UNFAVOURABLY placed in the world that its today's situation and prospects are hardly anything but GLOOMY (many countries here – like Chad or Sudan – have NO mineral resources, BAD soil, LITTLE water, NO exit to the sea, DISEASED and UNEDUCATED population, etc.).
There are not few countries in this group where over HALF of the adult population are ILLITERATE (i.e., cannot even read!), and where on average people can hardly expect to reach the age of 50 (very low LIFE EXPECTANCY indeed!).
# LOWERMIDDLEINCOME economies. ALL 54 economies of this group with 2.4 billion people and an average PER CAPITA GNI of less than $1,600 are far BELOW the world's average level. ILLITERACY remains a problem in some of these countries (like Morocco, Algeria or Guatemala), while LIFE EXPECTANCY at birth typically comes under 70 years. Many countries of this group represent the POSTSOCIALIST MODEL (according to the grouping discussed in Topic 1), including Bulgaria, China and Romania, while some of them have emerged as independent states only after the disintegration of the Soviet Union and/or Yugoslavia (like Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Georgia, Kazakhstan, Serbia and Montenegro, Turkmenistan and Ukraine).
# UPPERMIDDLEINCOME economies. There are 40 of such countries with not so big a population of 576 million and with an average PER CAPITA GNI of about $4,770, i.e., still BELOW the world's average. Typical for this group are LIFE EXPECTANCY figures ABOVE 70 years, while ILLITERACY usually ceases to be regarded as a national PROBLEM (except in some African countries like Gabon and Botswana). Here we find not only many “typical” developing countries, mostly in Latin America and Africa, but also some NIC, like Argentina, Chile and Malaysia, as well as many POSTSOCIALIST nationstates (the Czech Republic, Croatia, Estonia, Hungary, Lithuania, Poland, Russia and Slovakia).
# HIGHINCOME economies. Those are 79 such countries (roughly 1 billion people), including 30 members of OECD, often nicknamed the “club of the rich”. However, this group also includes THREE nations of the "first generation" of NIC – South Korea, Hong Kong, and Singapore (actually, ALL FOUR "Asian Tigers", if we add Taiwan which is NOT included in the Report). Here we can also find Brunei, Kuwait, Saudi Arabia and the United Arab Emirates – i.e., major OIL producers, members of the Organization of Petroleum Exporting Countries (OPEC).
In this group, also labeled the “Golden Billion, the figures for average PER CAPITA GNI have been estimated at $32,040, with a slightly lower average of $27,630 applied to the area of the European Monetary Union (the Euroland –the area of the EURO, with a population slightly over 300 million).
* If we use PER CAPITA GNI data to make comparison between individual GEOGRAPHICAL REGIONS within Developing World, striking DIFFERENCES and some interesting and sometimes UNEXPECTED FACTS can be discovered (please, return to List 1.10.3).
For example, it turns out that the LOWEST average level of PER CAPITA GNI of all such REGIONS was found in South Asia ($590) where India, Pakistan and Bangladesh are major and most populous countries (among the EIGHT developing members of that group with an aggregate population over 1.4 billion).
The vast SubSaharan Africa (SSA) with its 48 countries (720 million people) was placed slightly HIGHER – with $600 (but maybe the real figures are even lower – under $500 if we exclude relatively more developed South Africa).
The region formulated as East Asia and Pacific (24 developing countries with 1.87 billion people)) had an average PER CAPITA GNI of $1,280 – almost exactly the level estimated for China ($1,290).
In comparison, Middle East and North Africa, a region with a population around 290 million, which includes major OILPRODUCING area of the world and is also characterized by generally very favorable NATURAL CONDITIONS around the Mediterranean Sea, had an average PER CAPITA GNI of about $2,000.
Several countries in Europe and Central Asia, including several former republics of the Soviet Union and some other "postsocialist" nationstates in Eastern Europe, which are roughly industrialized but still in bad need of RESTRUCTURING and MODERNIZATION, have an aggregate population of 470 million people and produce around $3,290 GNI per person.
And Latin America and Caribbean, the most RICH region of the Developing World, home to about 540 million people, has an average PER Capita GNI of $3600 (with $6,670 for Mexico, $3,950 for Uruguay, but only $960 for Bolivia or mere $390 for Haiti).
Please, notice the fact that ALL these REGIONAL average indicators lie considerably BELOW the world's average of $6,280
* If you look attentively at the Table 1.10.1, you will see that it includes not only usual indicator "GNI per capita, Atlas method" (based on official exchange rates between national currencies and U.S. dollar), but also considerably different figures under the heading "Purchasing power parity (international dollars)". This concept "purchasing power parity", or PPP – is now ever more often used in hope to achieve BETTER COMPARISON of average INCOME or CONSUMPTION levels in individual countries. It takes into account differences in RELATIVE PRICES of goods and services and is measured in INTERNATIONAL DOLLARS which, in principle, have the SAME purchasing power as a dollar spent on GNI in the U.S. economy. Please, notice that for practically ALL developing countries this new indicator shows MUCH HIGHER levels of PER CAPITA GNI than traditional method (some examples: India – $3,100 and $620, China – $5,530 and $1,290, Chile – $10,500 and $4,910).
In modern statistical publications, a widely used measure of POVERTY is the "PERCENTAGE OF PEOPLE LIVING ON LESS THAN $1 A DAY” (or recently more often – “…ON LESS THAN $2 A DAY”) estimated on the "PPP" basis. For some "lowincome" economies, like Lesotho, Niger, Madagascar, GuineaBissau or Zambia, this indicator gives figures well over 50 and sometimes up to 90 percent, while in "lowermiddleincome" group the maximum level of POVERTY (in Guatemala and Peru) is also around 50 percent, and in "uppermiddleincome" economies it lies between 30 and 20 percent (Chile and South Africa). At the end of the 1990s, world's POOREST 20 percent consumed only 1.3 percent of available goods and services.
In an article devoted to some topical aspects of the financial and economic crisis in Asia, the author criticized Asian leaders for mistakes in their countries' financial and monetary policies, but still hailed (approved) them for achieving "the fastest reduction in poverty for the greatest number of peoples in history".
According to the World Bank, POVERTY fell by 27 percent in Southeast Asia during the decade 197585, and by another 35 percent in 198595. At the same time, according to InterAmerican Development Bank study, South American POVERTY rates shot up by 33 percent during 198095. The number of DESTITUTE POOR (those living on no more than $1 a day) rose to nearly 20 percent of the population. Even in such relatively welloff countries like Brazil, bottom 20 percent of people disposed of just 2 percent of NATIONAL INCOME.
* Interesting analysis of the Developing World situation can be performed on the STRUCTURAL basis. The LEVEL OF DEVELOPMENT expresses itself NOT ONLY in absolute terms (i.e., in the LEVELS of GROSS DOMESTIC PRODUCT and PER CAPITA INCOME), BUT ALSO in STRUCTURAL COMPOSITION of the GDP and GNI.
The DEVELOPED (highincome) economies have mostly INDUSTRIAL structure characterized by HIGH share of MANUFACTURING and modern SERVICES in GNP (and some of them are even POSTINDUSTRIAL in character – with SERVICE SECTOR responsible for over 70 percent of GNI and the share of MANUFACTURING – after a PEAK achieved sometime in the 1980s – reduced to under 20 percent).
In the DEVELOPING (middleincome) economies, typically LESS than HALF of the GDP (GNI) output comes from INDUSTRY (about 35 percent on the average) while the share of MANUFACTURING is around 20 percent (while almost ALL these countries want to become still MORE industrialized, not LESS). Here, AGRICULTURE still plays MUCH BIGGER role in the economy, than in the first group (slightly over 10 percent against under 2 percent). And SERVICES are mostly TRADITIONAL in character representing smallscale RETAIL TRADE, oldfashioned FINANCIAL SECTOR (partly of SPECULATIVE nature) and TOURIST FACILITIES.
And if we turn to UNDEVELOPED (lowincome) economies, we find that AGRICULTURE still is of major importance (it explains WHY the "leastdeveloped" countries are often also called "AGRICULTURAL", "AGRARIAN" or "RURAL” – words which all mean the same). As for the INDUSTRIAL sector, it is strongly UNDERDEVELOPED (seldom over 25 percent of GNP output).
Looking at the figures you can discover that almost ALL countries of the developing world are (or at least believe to be) in need of further INDUSTRIALIZATION.
Only a small number of New Industrial Countries (NICs) represents a rare exception. This group ( in publications containing ECONOMIC DATA about them often also called New Industrial Economies or Newly Industrialized Economies in both cases "NIEs") includes EIGHT countries and territories in Asia the "FOUR TIGERS" and the "FOUR DRAGONS" which by now you should well know by names, and FIVE Latin American states (Argentina, Brazil and Mexico – from the "first generation" of NIEs, which by the way still account for about 70 percent of Latin America's GNI, and Chile and Colombia – from their "second generation").
Another modern and interesting grouping of countries you can find in the Article 1.10.4.
* One frequently used MODEL for classifying countries by STAGE of DEVELOPMENT is that presented by American scientist Walt Rostow. He identified FIVE stages of economic development and noted that, with time, ALL the societies were MOVING from ONE stage to ANOTHER – and exactly this MOVEMENT is DEVELOPMENT (economic growth).
Stage 1: The traditional society. Countries in this stage LACK the capability of significantly increasing the level of PRODUCTIVITY. MANUAL WORK, mostly on LAND or in artisan WORKSHOPS, prevails. Only most PRIMITIVE TOOLS are being used. There is marked absence of application of modern SCIENCE and TECHNOLOGY. LITERACY is low, etc.
Stage 2: The preconditions for takeoff. During this period, the advances of MACHINE TECHNOLOGY are beginning to be applied in AGRICULTURE and MINING. Food and raw materials' PROCESSING emerges. The DEVELOPMENT of transportation, communications, power generation, education, health (what can be summed up as elements of "ECONOMIC INFRASTRUCTURE") begins in a SMALL but IMPORTANT way.
Stage 3: The takeoff. Generally speaking, INDUSTRIALIZATION gets under way. Growth pattern and structural changes become a NORMAL condition. Both HUMAN resources and INFRASTRUCTURE reach a level enabling ECONOMIC DEVELOPMENT. Modernization BOTH of RURAL and CITY life raises PRODUCTIVITY.
Stage 4: The drive to maturity. After TAKEOFF, sustained INDUSTRIAL GROWTH is maintained and the society seeks to EXTEND modern TECHNOLOGY to all fronts of local business activity. National MANUFACTURING takes on INTERNATIONAL INVOLVEMENT, finds its PLACE in the international division of labor (it already has enough TECHNOLOGICAL and ENTREPRENEURIAL skills to produce not EVERYTHING, but ANYTHING the country chooses to produce).
Stage 5: The age of high mass consumption. In economy as a whole, strong STRUCTURAL SHIFTS are observed: toward DURABLE consumer goods (houses, cars, refrigerators, TV sets, etc.), and toward modern SERVICE SECTOR – away from AGRICULTURE, traditional SERVICE SECTOR and NONDURABLE consumer goods (food, apparel, footwear, etc.). MIDDLE CLASS emerges and grows. PER CAPITA GNI and family INCOME rise to the point where a VERY LARGE number of people have significant amounts of money ABOVE minimum (subsistence) level.
Stage 6: The PostIndustrial Society. We add this stage to Walt Rostow's classification for better understanding what has been already achieved, at least IN PART, by some countries (the U.S., Canada, Switzerland, Sweden, Germany, maybe also Britain) and what the CURRENT TRENDS are (mostly in other OECD countries, including Japan, Korea, Australia).
Roughly, the concept of the Developing World embraces the first FOUR stages outlined above. The "undeveloped" or the "leastdeveloped" countries (also called above "lowincome economies") fall in the first TWO categories. The most typical "developing" or "lessdeveloped" countries (the majority of the "middleincome economies" with normal development potential, but still NOT rich) fit into the THIRD or FOURTH category. Only the "New Industrial Countries" (NIC), which do NOT fit the traditional mould of developing countries any more, are either BETWEEN the FOURTH and the FIFTH stages, or have already reached the FIFTH stage.
* For the last threefour decades, the Developing World has been going through giant POPULATION EXPLOSION, and it is still under way. That is WHY high rates of ECONOMIC GROWTH have become major national goal for the majority of developing countries (in most cases – an unattainable goal). The POPULATION GROWTH and the ECONOMIC GROWTH are engaged in a genuine RACE, and the historic outcome of this race sometimes represents an issue of life or death for millions of people.
It partly explains WHY the INDUSTRIALIZATION processes keep their extraordinary importance for the Developing World nowadays. The determinant (decisive) factors in securing INDUSTRIAL DEVELOPMENT are:
# FINANCIAL RESOURCES (development funds) available for ACCUMULATION and INVESTMENT purposes, and
# MARKETS for emerging MANUFACTURING (intermediate and finished products).
However, the Developing World suffers exactly from CHRONIC LACK of both NATIONAL INVESTMENT FUNDS and DOMESTIC MARKETS.
The CAPACITY of the MARKETS here is far from sufficient for production on a MASSSCALE securing LOW unit costs and HIGH efficiency. The STRUCTURE of DEMAND usually does NOT correspond to emerging industrial SUPPLY as well.
So, the INTERNATIONAL factors concerning the formation of INVESTMENT FUNDS and securing sufficient MARKET CAPACITIES able to absorb domestically manufactured INDUSTRIAL PRODUCTS (i.e., approach to EXPORT MARKETS in developed countries) gain paramount importance.
* Additional hardships are connected with the LACK of the socalled "ECONOMIC INFRASTRUCTURE" which represents those types of capital goods and socialeconomic institutions that SERVE the emergence and current activities of different INDUSTRIES, as well as the ECONOMIC DEVELOPMENT as a whole.
There are different classifications of WHAT the term "ECONOMIC INFRASTRUCTURE" should include. In my view, it consists of THREE components:
INDUSTRIAL infrastructure, including paved ROADS, RAILROADS, SEAPORTS and AIRPORTS, COMMUNICATION networks, ENERGY and WATER supply, and the like; to create such objects, especially BIG investment money are necessary, while PROFIT from such investments is usually LOW and arrives AFTER MANY YEARS only, if ever; it exemplifies "CAPITALINTENSIVE but LOWRETURN projects" for which the FINANCING comes, as a rule, from the national STATE BUDGET),
FINANCIAL and COMMERCIAL infrastructure (or "service infrastructure"), including BANKING systems and other CREDIT facilities, MARKET networks (stores, warehousing storage facilities, distribution centers), ADVERTISING agencies, MARKETING research institutions, qualitylevel specialized MIDDLEMEN, etc.),
SOCIAL infrastructure (also called "social overhead"), including EDUCATION (schools and universities), HEALTH CARE (hospitals and clinics), SCIENCE (research facilities), LIFE INSURANCE, PUBLIC UTILITIES ("municipal economy"), and many CULTURAL and ARTISTIC establishments.
The presence of a GOOD INFRASTRUCTURE is a mighty DEVELOPMENT factor, while its absence represents a serious OBSTACLE (hindrance, handicap) to successful INDUSTRIALIZATION and ECONOMIC GROWTH in general.
Regretfully, the LESS developed a country is, the LESS adequate its INFRASTRUCTURE is for conducting business and facilitating investment activities.
WITHOUT sufficient transportation facilities, for example, the distribution costs of industrial firms can INCREASE substantially. WITHOUT adequate warehousing, a significant part of all kinds of harvest can get LOST. And WITHOUT electricity generating capacities, largescale investments are virtually IMPOSSIBLE.
As economy develops, a country's INFRASTRUCTURE usually expands to meet the needs of growing PRODUCTION and MARKETS. However, when the INFRASTRUCTURE lags behind, the country begins TO LOSE economic development ground. For example, conditions can arise, where a country produces COMMODITIES for export, but CANNOT export them because of inadequacies of the INFRASTRUCTURE (remember Zimbabwe, which actually exports only about ONETHIRD of agricultural products available for foreign trade). Even NIC, like Mexico, must struggle with inadequate tradesupporting services.
* ECONOMIC DEVELOPMENT is generally understood to mean ECONOMIC GROWTH, i.e., an INCREASE in national production and, as a result, in the level of PER CAPITA indicators. But this definition is NOT perfect. Aside from QUANTITATIVE growth, we have also to consider QUALITATIVE development – STRUCTURAL CHANGES in the economy and in social composition of the population, as well as the character of INCOME DISTRIBUTION in the society (is it widespread one, or do the FEW rich people coexist with MANY very poor families, is the socalled "MIDDLE CLASS" big enough and growing, etc.).
Certainly, most countries associate with ECONOMIC DEVELOPMENT the achievement of SOCIAL as well as ECONOMIC goals. Better education, better housing, better and more effective government, more democracy, elimination of many social inequities, and improvement of moral and ethical responsibilities – those are some of the EXPECTATIONS connected with industrialization and economic growth. Thus, ECONOMIC DEVELOPMENT is NOT measured solely in ECONOMIC indicators, but also in SOCIAL achievements.
Paradoxically enough, because FOREIGN FIRMS doing business in a developing country are ALIENS (outsiders), it is often WRONGLY assumed that their presence is LIMITING the attainment (achievement) of national goals, rather than ASSISTING and FACILITATING progress in developing societies. The widespread FEAR and RESENTMENT of foreign control over national economy commonly lead to the adaptation of policies and actions that RETARD, rather than FACILITATE, economic and social PROGRESS. Yet, though crucial role of foreign enterprise and marketing activities is often NOT appreciated, they CAN play (and are actually playing) SIGNIFICANT ROLE in helping countries to achieve their objectives.
* ECONOMIC DUALISM, i.e., coexistence of MODERN and TRADITIONAL sectors within the economy, is generally very typical for a developing country.
The MODERN sector is centered in BIG CITIES with jet airports, international hotels and supermarkets, new factories, and a small Westernized middle class.
Along with this very special environment, there exists TRADITIONAL sector containing the majority of population, mostly in rural areas. Although these TWO sectors may be very close GEOGRAPHICALLY, they usually are CENTURIES AWAY from each other in modes of PRODUCTION and CONSUMERISM.
The DUAL economy affects the SIZE of the market and, in many countries (like India or Indonesia), creates TWO distinct LEVELS of marketing activity.
The MODERN sector demands products and services SIMILAR to those found in any Western country (or in Japan, for that matter), while the TRADITIONAL sector demands items MORE indigenous (natural, primitive) and basic to subsistence.
* Actually, we already began speaking about INTERNATIONAL FACTORS influencing INDUSTRIALIZATION and SOCIAL DEVELOPMENT in retarded regions of Asia, Africa and Latin America. Now, let us do it more thoroughly starting with the issues of INTERNATIONAL TRADE and then switching to FINANCIAL matters.