In todays increasingly multi-polar world, economics issues are gaining in relative significance. Therefore it is important to recognize and understand the changes taking place in the recent world economy, thereby developing appropriate policies which will assure global stability and economic prosperity. Although economic interdependence has always existed to some extent, technological advances of the last forty years and increasingly global nature of production have resulted in a quantitative and qualitative change in the degree of this interdependence. Sustained economic growth has become increasingly dependent on freedom to engage in economic exchange and other activities across national boundaries.
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What is economic interdependence of countries?
Economic interdependence is a relationship between two or more people, regions, nations or other entities in which each is dependent on the other for various economic variables such as goods, services, currency, financial tie-ups, etc. Economic interdependence often occurs when all parties are specialized in the fulfillment of some requirements, and must trade with others for unmet requirements.
This economic interdependence or economic integration centers on the four main economic flows that characterize globalization:
Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population: higher the percentage higher is the intensity of globalization of the country because its shows higher interdependence between this country and other countries (of course, both exports and imports must be high, only imports will not do)
Labor, e.g. net migration rates; inward or outward migration , weighted by population – higher the incidence of migration, preferably both ways, higher is the interdependence between this country and other countries.
Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population – the higher is the flow of one country’s citizens’ investment in other countries and vice a versa, the higher is the interdependence among countries in terms their common interest in the growth and development of all countries, and therefore higher is the extent of globalization.
Technology, e.g. international research & development flows; proportion of populations using particular inventions; the more different countries co-operate and collaborate on technological progress and take each other’s help on technology adaptation, the greater is the interdependence among them and greater the extent of globalization.
Aspects of Interdependence
Foreign trade is the oldest indication of international economic interdependence. However recently, the rapid expansion of world trade at a rate higher than that of world output growth, and the changes in its relative composition and geographic distribution have contributed to and reflected the qualitative difference in the nature and degree of interdependence which has occurred over this period.
Foreign Direct Investment
Foreign direct investment ( FDI) has become an increasingly important activity over the last twenty years or so. The motivation behind corporate decisions to undertake foreign investment is diverse but can be grouped under the two broad categories of cost and/or market considerations, including trade substitution and import barrier evasion. Foreign direct investment has become particularly important in the services sector. Although in earlier decades FDI was concentrated in raw materials and other primary products, today the main sectors are services and technology-intensive manufacturing.
Globalization of Technology
Technological resources and R&D activities remain largely concentrated in the Triad countries (US, Japan, EC). The dependence of countries outside this group on Triad technology is therefore very substantial and transfer of this techno-logy, generally through direct investment by Triad multinational enterprises, is of prime importance. Within the Triad, the level of technological interdependence is high and increasing further, particularly in the new high-tech areas, prompting the coining of terms such as “techno globalism”.
Transitional Information Flows and Network
Data communication services are one of the most rapidly expanding areas of economic activity. The rapid expansion of these new services can be expected to outstrip the growth of voice communications and, in the long run, they could become more important in absolute economic terms.
The developments outlined in the preceding section have been instrumental in promoting the spread of new forms of corporate strategies at the international level. These strategies are based concurrently on cooperation and competition between economic operators engaged in various forms of joint value creating activity. The resulting interrelationships are usually referred to as “networking” while some analysts now increasingly speak of the emergence of a “networked economy”.
The emergence of a global financial market is the most highly developed and pervasive aspect of economic interdependence. The advances in informatics and communications technology, within the last ten years, have permitted the development of instantaneous and continuous trading in currencies and financial assets across the world, thus creating the most truly global market.
Inter-dependence of India on other countries
India’s economic liberalization and export orientation after 1991 has yielded better growth rates compared to the decades before. The new economic policy is regarded as the only strategy to cope with the problems of underdevelopment and unemployment in the long run. Indian government is planning to diversify energy imports and acquire equity oil by India’s state owned oil companies.
At present India is the sixth largest consumer of energy and the third largest consumer of oil and gas in Asia only after Japan and China. India’s main domestic energy resources are coal, hydro, gas, oil and nuclear power. All the forecast predict that India’s hunger for energy will increase as a result of growing population and rapid industrialization. And by 2030, India’s importing oil supplies percentage will increase from 70% to 90% and overall import dependence will be around 40% by then.
Cooperation between China and India are the common development of the Yadavaran oil fields in Iran. She has also extended their cooperation to regions like Africa where Indian and Chinese companies have cooperated in Sudan. Besides China, the quest for energy and oil & gas has also intensified India’s relation with Russia and African Countries respectively. Apart from this, Germany and USA based companies are leading luxury car selling companies in India. Most of the petroleum products of India are imported from gulf countries. Thus the fluctuation in the petroleum prices in these countries affects the prices of petroleum products in India.
This needs of energy by India reflect the new constraints of interdependence that India is confronted with in the era of globalization. On one side it shows India’s new economic and political strength in international affairs, on the other side one sees India’s new dependences and vulnerabilities because of the linkage with many security issues. However India will probably benefit from the new interdependence although it will introduce new constraints on her foreign policy. This way India’s growing economic interdependence will change the discourse in the long term perspective. This clearly shows the dependence of India on other countries for its resources.
Challenges of increasing economic interdependence on each other
A Stable and Open World Economy
The various forms of international economic make up an intensive and complex system of global interdependence. The interlink ages between individual economies are too strong and the momentum of globalization too great for the process to be reversed. In such a system, where wealth-creating activities are increasingly transnational, it makes sense to facilitate these activities by providing an open and stable world economic environment. This requires effective policy co-ordination between governments, at least of those economies whose size is such that they can have a significant impact on the global economy.
An open environment means more than an open trade regime. It entails open regimes for foreign direct investment, for capital flows, for access to networks and for all forms of international economic activity.
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To address imbalances
Economic interdependence is strongest and most intricate among the countries of the industrialized world. It is by no means limited to these countries. The direct links between western industrialized economies and the Third World may still be less complex but they are, nonetheless, significant and two-way.
A closer partnership with the developing world
Involving the developing countries more fully in the international structures required to manage international economic activity will promote their economic progress and assure their political will to undertake the obligations this entails. At the same time, a more consistent effort to reinforce political relations with these countries, by engaging them in a more comprehensive and constructive political dialogue would help to promote a greater sense of commonality of interests.
Towards a More Global and Comprehensive Regulatory Framework
One consequence of the globalisation of economic activity is that it is now more difficult to distinguish between its various forms and the motivation behind them. Its effects are also becoming less clear. As economic globalisation proceeds, a more comprehensive and more coordinated approach to international regulation is called for. The growing complexity of international economic interconnections means that the present “Compartmentalization” of regulatory issues is becoming increasingly inappropriate. It is, therefore, becoming more widely accepted that international rulemaking will have to cover new areas of economic activity and address new concerns, as well as shifting current types of rules from the national to the international.
Issues of Increasing Economic Interdependence
Loss of Flexibility
Regional integration can make it difficult for national governments to create and implement policies based on their own particular needs. This can be problematic when the specific economic conditions within a member country require actions such as adjusting the money supply or increasing public debt in order to finance infrastructure development or entitlements. These policies, while necessary for one member nation, could skew the economies of other member nations. Additionally, richer member nations may be forced to bail out poorer member nations or risk devaluating their currency and diminishing the whole regional economy.
Increasing Political Influence of Corporations
As national economies become more intertwined, the advocates of the free market exercise an unprecedented amount of political autonomy and influence. By nature of being decentralized due to access to resources including cheap labor, no government can effectively exert influence on a corporation of sufficient size. In the United States, for example, corporations fund lobbying entities to exercise their political capital.
Widening Gulf of Wealth
This autonomy of profit-making entities ensures that the bulk of the wealth generated by economic activity can be fed back to the upper management of these entities without oversight or controversy. The result, as seen during the economic crisis of 2008 is an increase in economic inequality, where a tiny sliver of the world’s population has amassed a relatively gigantic proportion of the world’s money where the share of that wealth by the middle and lower classes has actually decreased.
One major consequence of globalization is that as demand grows for manufactured goods, the pressure to drive down the costs of manufacturing is manifested. This usually means that labor becomes devalued, wages are driven down and unions are eliminated, discouraged or severely weakened due to the emphasis placed on unskilled labor
If one country in a region has resources the other states lack, these resources rightly or wrongly are often seen by others as a political weapon. Battles have raged in Eastern Europe over the relations between Ukraine and Russia. Russia has offered a regional integration scheme many times wherein regional states such as Armenia and Kazakhstan can share resources and open markets. Ukrainians have responded by accusing Russia of using its superior oil and gas wealth to hold the Ukrainian economy hostage. This use of resources as a weapon, real or perceived, can be another result of imbalances in regional power arrangements.
Observation and Recommendations
Policy makers have to adapt their thinking and their policies to this trend if they are to succeed in managing economic developments to the benefit of their societies as a whole. A static and fragmented approach to policy making will fail to take into account the growing interlink ages and overlap of interests which are eroding traditional concepts of so-called national economic interests. A longer-term approach to economic policy-making is more necessary than ever before.
Economic liberalization alone will not resolve structural problems such as unemployment or outdated production infrastructures, but it can be instrumental in creating the overall economic growth which will facilitate the necessary restructuring. The root causes of the problems have to be tackled by appropriate measures to educate and retrain workforces, to encourage investment and modernization of capital bases, to promote R&D etc. It is important, therefore, that governments take the domestic measures necessary to assure the political viability of a policy of economic openness. It is self-defeating for individual countries to try and alleviate structural problems by protectionism.
In an interdependent world, the traditional adversarial approach to multilateral negotiation or coordination is becoming increasingly inappropriate. Genuine multilateral cooperation calls for a widespread recognition of the
commonality of interests engendered by economic globalization, even among competing economies. Public awareness of the real interests at stake should be increased. This will in turn permit governments to undertake the multilateral initiatives required to manage an interdependent world economic system.
Globalization of economic activity and hence growing economic interdependence is an inescapable fact, although its implications are not always fully recognized or understood.
International economic interdependence means that competing economies have
a common interest in assuring macroeconomic stability, an open world economic system and a multilateral framework of rules and institutions to manage global economic activity.
Sustained economic growth in the new market economies and the developing countries, and their integration into the emerging global economic system will benefit the industrialized countries as well. It is in the interest of the latter to promote world-wide economic development.