Essay on "Investment and Trade Development Studies"

Essay 6 pages (1828 words) Sources: 5 Style: Harvard

[EXCERPT] . . . .

PSYCHOLOGICAL VIEW of INVESTMENT & TRADE DEVELOPMENT STUDIES

The objective of this work is to critically evaluate the views that International trade and investment are factors that promote economic growth.

Debate and confusion surround international trade and investment specifically in regards to whether these two are factors that indeed serve to promote economic growth. Garcia (2005) relates that the social psychologist interest is focused upon the "social formation of perceptions of justice and injustice and their effect as motivators - the human emotional responses they provoke. Understanding the psychology of justice is important for those of us who are trade lawyers and also concerned about peace and security." According to Garcia any attempt to explain social order or social control requires that the primary focus be "implicitly or explicitly on member's beliefs about the justice of their institutions, for that belief will affect their willingness to maintain or destroy that society." (2005)

I. THEORY on INTERNATIONAL TRADE & INVESTMENT

One method that can be used in exploring investment and trade development is through the equity theory which is stated to view "all interpersonal interactions, including trade transactions, as exchange transactions involving various resources." (Garcia, 2005) According to Garcia when investments or inputs are made by people and they expect to "receive certain rewards or outputs...in return. The perception of trade investment development therefore would be dependant upon the individual's "evaluation of the proportionality and reciprocity between" that individual's inputs into the social system and the outputs which that individuals receives. Garcia states that in the attempt to understand the perception of people of the trading system and "its effects on their inputs and outputs. Insofar as one perceives trade to be unjust, i.e. As negatively affecting the reciprocity or proportionality between one's inputs and outputs, it is not likely to be part of the security solution; instead, it is itself part of the problem." (Garcia, 2005) Garcia additionally relates that the expectations of people concerning trade "...is that trade is supposed to be a win-win proposition. According to conventional liberal trade theory, we can reasonably expect that freer trade will lead to overall welfare increases." (2005) There is however, the acknowledgement that there will still be both 'short-term and individual compensated losses.' (Garcia, 2005)

II. The QUEST for ECONOMIC GROWTH IS ELUSIVE

The work of William Easterly entitled: "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics" is reviewed in the work of Ebeling (2002) who states that poverty is "unfortunately...the natural condition of man. Institutional arrangements and order, according to Ebeling are not "easily quantified or measures, but they nonetheless serve as the societal rules and patterns of human conduct that make material and cultural improvement possible for mankind." (2002) the statement of Douglas C. North (1993) of "We cannot feel, touch, or even measure institutions; they are constructs of the human mind.... [Yet] they are the underlying determinant of the long-run performance of economies.... The major role of institutions in a society is to reduce uncertainty by establishing a stable... structure to human interaction" is noted by Ebeling who states that the theme of Easterly's work is "...that besides the natural barriers to man's improvement, governments have imposed and enforced various institutional rules and regulations that have undermined both incentives and opportunities for economic development in various "Third World" countries around the globe.'(Ebeling, 2002) Additionally Easterly holds that international agencies such as the International Monetary Fund and the World Bank have tended only to make matters far worse by establishing aid and loan programs that often have rewarded bad policies and political arrangements in those nations." (Ebeling, 2002)

III. PRIMARY FOCUS of DEVELOPMENT ECONOMISTS

Development economists have had a focus primarily on "the importance of capital accumulation" for the purpose of bringing about improvement of the economic condition of the poor of the world." (Easterly, as cited in Ebeling, 2002) However, Ebeling notes that Easterly pointed out that capital investment rates that were introduced in various Third World countries produced no corresponding gains in economic growth. In fact, in some of the countries growth rates fell or even went into the negative figures." (Ebeling, 2002) Education was also another "panacea that development economists latched on to..." upon the basis that a population that was more educated would result in a population that possessed better skills and that were a more productive workforce. This is turn was held to be the method needed in the creation of "incentives for foreign investors to move their capital to poor countries, against helping to accelerate investment and growth." (Ebeling, 2002) Ebeling believes that the right incentives are 'key' in the desire of people to become enabled to "apply themselves in productive and profitable lines of market activity." (2002) Forcing people into educational institutions do not result in education of these individuals because "People will want to learn and will desire to acquire an education when they see future income and profit possibilities from acquiring various types of knowledge and skills. And people are able to make their own decisions as to the "optimal" size of the families they want, and often they freely choose to have fewer children as economic opportunities are opened to them in a vibrant market setting." (Ebeling, 2002)

IV. FREE MARKET GROWTH DERIVED FROM CAPITAL INVESTMENT

Easterly holds that free market growth is derived from capital investments due to the development of "profitable niches" as well as exploitation of these niches. Easterly further places great emphasis on the idea of Joseph Schumpeter relating to 'creative destruction' which has as its basis that "All improvements and innovations in a society involve replacing the existing ways of doing things with new ones. This necessarily pressures those employed in the more traditional methods of producing to adjust to the changed economic environment, requiring some people to learn new skills, change their place of work and residence, and even accept lower-paying employment for a period of time. But that is the price of progress and longer-run rising standards of living for all, including those negatively affected by the innovative and competitive changes in the short run." (Eberling, 2002)

V. GOVERNMENT KILLS GROWTH THROUGH INFLATION

Easterly specifically states of governments that they "can kill growth" through "Inflation, high taxes, supply-side regulations and controls, and trade and investment restrictions are all policy tools that retard and inhibit people's free ability to find market avenues for economic betterment. The politically regulated and manipulated economy inevitably creates an environment of corruption and privilege that wastes people's time, labor, income, and resources in just trying to bribe those with power. The political powers become wealthier and the society becomes that much poorer." (Easterly, 2002; as cited in Eberling, 2002)

VI. INDICATORS of VULNERABILITY

The work of Grabel (1999, 2003a, 2003b) sets out the "trip wire-speed bump approach" and is an approach in which the trip wires provide indication of areas of vulnerability in order to "illuminate the specific risks to which developing economies are exposed." (Grabel, 2004) Some of those vulnerabilities are: (1) the risk of large-scale currency depreciations; (2) the risk that domestic and foreign investors and leaders may suddenly withdraw capital; (3) the risk that vocational and/or maturity mismatches will induce debt distress; (4) the risk that non-transparent financial transactions will induce financial fragility; and (5) the risk that a country will suffer the con contagion effects of financial crises that originate elsewhere in the world or within particular sectors of their own economies." (Grabel, 2004)

VII. GOOD INSTITUTIONS SUPPORT GROWTH

The arguments set forth in the work of Easterly (2002) is that good institutions provide the basis for growth of an economy through creation of the "right market-based and market-guided incentives." (Eberling, 2002) These 'good institutions' are represented by: (1) rule of law; (2) competitive markets; (3) low taxation (4) noninflationary monetary policies; and (5) free trade. (2002) Good institutions serve to "Foster other cultural patterns of conduct, hard work, savings and industriousness, honesty and trustworthiness, creativity, and self-responsibility. These are the bases of the wealth of nations." (Easterly, 2002; as cited in: Ebeling, 2002) Because of the financial instability of the past ten years the study of specific types of capital controls have been revived as these tools are used as controls in reduction of the chance of or for the purpose of mitigation of "the effects of financial crises on developing economies." (Epstein, Grabel and Norno, 2004)

SUMMARY & CONCLUSION

The literature reviewed in this study has shown that more investment occurs when people have expectations of receiving something in return. Additionally this study has illustrated that the primary focus of development economists has been "the importance of capital accumulation" for the purpose of bringing about improvement of the economic condition of the poor of the world." (Easterly, 2002) Free market growth is derived from capital investment also referred to as creative destruction. Growth is often killed by governments due to inflation and there are risk factors which are helpful in identifying various presenting risks including: (1) the risk… READ MORE

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