Integrated international production and non-market activity.

Author:Hasnat, Baban
 
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The greater reliance on markets in managing economic activity is now recognized as a major feature of the new world economy. To many, it has appeared that the ideological contest between market and non-market is over and has been won by market. The advantage of a greater reliance on markets is accepted as a foregone conclusion. It is not that countries such as Thailand, Malaysia, and South Korea that are said to have enjoyed market-led growth are not subject to any economic crises, but that such events are blamed on lack of sufficient reliance on market forces. We are told to have a ". . . great confidence in the powers of markets to liberate mankind" [Henderson 1997].

The notion of the triumph of market forces over non-market forces in managing economic activity is appealing, but a closer look also reveals a surprising rise in non-market activities. The purpose of this paper is to discuss and explain this paradox - the simultaneous rise in market activity amid greater reliance on non-market forces - and to examine some of its implications for policymakers. This paper explores the issue by focusing on the institutional basis of international exchange.

The Increasing Importance of Markets

The greater reliance on markets is widely manifested in the proliferation of initiatives in liberalization, deregulation, privatization, and fiscal and monetary reform worldwide. These initiatives cover a wide range of areas such as capital and labor movements, technology transfer, exchange rate determination, international trade policy, environmental policy, and control of foreign investment. The great increase in bilateral, regional, and multilateral agreements in the above areas are indications of a shift in policy orientation toward market organization. According to the Heritage Foundation [1998], 49 countries improved their "economic freedom" scores from last year in the direction of greater economic freedom.

Private sectors now play an expanded role in many parts of the world. Private ownership is allowed in industries such as transportation, telecommunications, and utilities that were once reserved for public ownership. Many developing and Eastern European countries now have active privatization programs. Between 1988 and 1993, privatization programs recorded $271 billion cash sales in 2,655 transactions in 95 non-Communist countries [International Finance Corporations 1995, 9].

By 1992, more than 63 developing countries liberalized the trade policies that were in effect at the beginning of the Uruguay Round talks [UNCTAD 1992, 101]. The completion of the Uruguay Round extended the General Agreement on Tariffs and Trade coverage to services and agriculture, enhanced rights to intellectual property, and established a World Trade Organization to monitor the international trading system. Under the Uruguay Round, the average tariff for manufactured goods in developed countries is expected to decline to 3.9 percent by 2000.

Many countries have been progressively removing or easing restrictions on capital flows. During 1995 alone, 64 countries made 112 changes to laws governing foreign direct investment (FDI(1)). All but six of those changes liberalized FDI regimes [UNCTAD 1996, 132]. Exchange rate stability and multilateral systems of payments are no longer determined by the International Monetary Fund, but primarily by market forces. Independent foreign currency dealers manage $1.2 trillion per day. Citibank alone moved more than $500 billion per day in 1995 through electronic transfers. Private capital flow is displacing the need for the World Bank. Overall, these data confirm the growing importance of market forces in the international economy.

The Increasing Importance of Multinational Corporations

Firms generally follow an evolutionary sequence as they transform from being domestic firms to multinational firms, which own or control economic activity in more than one country. Most firms start first by serving the domestic market. Then, based on experience and competitive advantages gained at home, they may serve foreign markets either via exports or by investing to produce their products abroad. The latter, called international production, can be broadly defined to include foreign production of final goods, intermediate goods, and services. The multinational corporation (MNC) is the main institutional agent of international production, and FDI is typically the preferred means by which international production is...

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