The Global Political Economy
Question 1
Main changes due to the global financial systems and impacts of the changes on the well-being of people.
The global financial system plays a pivotal role in fostering international trade through the easy flow of credit across trade borders. It comprises the international monetary systems IMS and the global credit system. The global financial system has undergone a series of changes over the last four decades. There has been a massive shift from fixed exchange rates to the adoption of floating exchange rates as more global states adopt regional currencies in place of the national currencies. The Mundell – Fleming model expounds on the relationship between exchange rates, Capital flow, and the domestic policy, highlighting the financial innovations and crises that have since been experienced following these changes (O’brien, 2013).
Herein are the main changes of the global financial systems and their impacts on the well-being of the people. Firstly, The IMS shift from fixed to floating regional currencies. The international monetary systems govern the exchange of national currency. Over the years, the fixed exchange rates were dismantled by the Triffin dilemmas. This was because the countries failed to adjust their exchange rates (O’brien, 2013). This shift in the exchange rates affected the value of currencies. The currency value appreciated while others suffered a devaluation and directly impacted the respective countries’ economies and overall development. Notably, there was an increased global credit crisis. The global credit crises have led to the government running on budget deficits as it spends more than it collects through tax revenues (Subacchi, 2010). Within increase government debt, so does the increased accumulation of the deficits the Bretton woods system was created. However, the Breton woods had its limits as it resulted in the overhauled dollar, thus the trade deficits and limits in fixed exchange rates in competitive circumstances. The future of global finance is uncertain with the covid -19 pandemic effects of international trade, thus the entrenched financial globalization.
Secondly, there has been an increase in corporate and individual tax buses. Most governments relay of revenues from the tax to finance crucial sector of the economy such as education, national security healthcare, among others, however with the increase transitional corruptions where wealthy person’s use the global financial system to evade tax payments, with an increase in cases of tax evasion and blurry tax avoidance schemes. Many states suffer financial constraints due to limited tax revenues to finance the project to and crucial sectors of the economies. Multimillions are opting to transfer taxable assets to offshore destinations, often referred to as the tax havens; according to the Tax Justice Networks, an estimated between 21 trillion to $ 32 trillion is lost through these tax havens. With no transparency, limited tax information, and regulation policies. However, in some countries such as Seychelles, Mauritius, and the Cayman Islands, some of the wells know tax havens use it as a political strategy; it has become a channel for increase national tax loopholes and tax avoidance schemes (O’brien, 2013). Through these tax evasion schemes, the wealthy continued to accumulate their wealth. In contrast, the law-abiding tax-paying citizens suffered hefty taxations as the governments strive to compensate for the inadequacies of the revenues to help run their countries and economies.
An exemplary instance being the Mexican debt crisis in August of 1982 when the country gave an official statement claiming that it no longer could service its debt and was ranked among the highly indebted developing countries. The Mexican debt crisis rapidly spread through Latin America, affecting oil exporters. It took time for the Mexican government to reestablish its peso for it to be supported to borrow capital as it was viewed as overhauled. Notably, another major crisis was the East Asian financial circs of 1997 (Subacchi, 2010). When the east Asian currencies appreciated following the increased competitive pressure from German and Japanese, attacks on the Asian countries forced them to abandon the fixed exchange rate. This, in turn, requested the devaluation of their currency and needed a bailout from the international monetary systems.
With the substantial changes due to the evolution of the global financial system, the changes in the shift in market forces and national authorities have led to the increase in market actors; there was increased instability. Through transition on the FX Markets, fluctuation in the exchange rates influences the Purchase power of the currencies. In the past forty years, the world economies have undergone profound changes whereby markets have increased, the role of government decreased as international financial transactions have risen by leaps (Sen, 2001). Over the years, the dollar has remained the primary reserve currency; however, with the changes, there are forms of disequilibrium, for essence while china holds the largest shareholder of the dollar reserve, thus is push to mention it as the reserve currency, other states are struggling to be an end to the currency system. In the wake to increase the IMS fundamental principles, adjustments, and stability, and eradicated future trigger of imbalances
The financial crisis has pushed for the general reassessments of the functionality of the global financial systems in regulating global financial transfers. While it has undergone numerous changes since post Second World War, the global situation has resulted in prolonged monetary system instability. With the increase in trade and financial integrational globally, there is an increased accumulation of foreign exchange reserves and financial imbalances. The exchange rates are nowadays determined by international markets that govern the national liquidity. Furthermore, the US sub–prime mortgage market uncertainties is a significant issue that resulted from the changes in the global financial systems. The Bretton woods system is influential in creating post-war economic cooperation as it institutionalizes the gold exchange standards; however, with the rapid economic growth, there was increased American credit that resulted in the deterioration of the dollar (O’brien, 2013).
These changes had an immense impact on the way of life for citizens; all led to the rise in debates questioning the functionality and autonomy of the global financial systems democracy. It leads to several governments running on their projects to funding their welfare policies at the expense of their investors; with such deficits, investors pull out from funding the government. An increased transfer of money by investors huts the government finances and its businesses. Secondly, it led to the financial crisis that resulted from neoliberal regulation (Subacchi, 2010). for essences, during the financial crisis, in the united states, its citizen lost their savings, homes, and jobs as the government tried to shore up the institutions that created the problems. For developing countries, they suffered even more detrimental consequences as the shortage of fund threatened the social policies and development strategies leading to the prolonged economic downturn. This has since weathered down developing countries in their quest for development and economic expansion.
Sources of inequalities between the Global North and Global South are the theoretical approach that explains underdevelopment and the appropriate solutions to reduced global poverty levels.
There is an increased gap between the global north and the global south. The global south nations are largely compressing with the developing countries, often referred to as the third world, while the global north represents Western countries. The primary sources of inequalities are different wealth levels, income inequality, Democratic differences, and notably freedom indices. The global north note is characterized by technological advancement and political stability, whereas the south is highly dependent on the north, primarily agrarian-based with political instabilities. The global south suffers domination by the north over its politics, and international trade increases the inequality gap. These indifferences constitute a significant source of cries and threaten global security and peace (O’brien, 2013).
Development is often defined as the continued advancement by individuals and states towards bettering the living stands. Development is one of the principal national concerns inscribed in the international agendas; many nations struggle to execute the national and international development policies as they strive to overcome post-war development. However, according to statistics, over 736 million globally live in abject poverty. Over half of these populations live in developing nations. Additionally, over 2.5 billion people do have ready access to improved sanitation standards and another billion electricity. The global stratification in nations unmasks the inequality and burden of poverty (Sen, 2001).
There is a theoretical perspective that seeks to expound on the underdevelopment and levels of poverty globally. There have since been numerous theoretical perspective approaches to explain the political economy of development. Many nations today strive to achieve sustainable development as they hustle to ensure the development levels and rates meet the present populace’s needs without compromising the projected future’s ability to be self-sufficient. The dependency theory seeks to expound on underdevelopment while highlighting the pathways towards overcoming underdevelopment globally. The theory is focused on the influence of external relationships in influencing the developmental process. These theories are focused on explaining the impacts of the external and internal facts that hinder society from achieving development. It emphasizes the roles of external forces that control economic growth. Further, the theory asserts that t in the leading causes of underdevelopment to the lack of appropriate values, limited theological exposure, lack of capital. It believes one way to overcome underdevelopment is through positive western influence, economic diffusion, free trades, and focus on obtaining the comparative advantage (O’brien, 2013).
Furthermore, the dependency theory argues that underdevelopment resulted from economic exploitation, whereby the development of one state was a direct result of underdevelopment in another. When developed nations often exploited the underdeveloped states for raw materials and cheap about while creating highly sought-after products. The economic and financial crisis has constantly hit developing countries as they lack the resources necessary to stimulate the economy from the influence of the external nations (Sen, 2001). The development theories believe that development can only be achieved by breaking the ties of external influence. Like the dependency theory illustrates, the causes of underdevelopment are the conditioned expansion and development of other nations; a push for the interdependence of nations can help eradicate poverty.
The push for economic growth and development is in the wake to eradicate global poverty, reduce the gaps of inequalities of global disparities of induced power, and improve the living standards of citizens. To achieve this, a lot of efforts have been put. Firstly, through debt reliefs, in 2006, the MDRI was created to provide 100 debt relief for the world banks, the African development banks, and the IMF to particularly the low-income countries (O’brien, 2013). The HIPC obtained free up of resources that would then be sued to eradicate global poverty through is a relief. Notably, the IBRD provides loans and development assistance to credit-worthy poorer nations. Furthermore, international development associations come in handy in providing long-term loans with zero interest to countries living in abject poverty.
One of the significant ways to achieve better development includes the decolonization of states. Through decolonization, the state can foster state-led development strategies with minimal external influence. When states have the power to control their economy, it is easier to track the development process. Most developing nations suffered underdevelopment since they were under colonial powers that controlled most of their curial sectors such as the minerals, trade, and political systems, making it impossible to make progress. Eradication of dependence on the western Nailon by the global south is imperative for attaining financial independence and improved development (O’brien, 2013).
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References
O’brien, R., & Williams, M. (2013). Global political economy: Evolution and dynamics. Macmillan.
Sen, A. (2001). Development as freedom. Oxford Paperbacks.
Subacchi, P. (2010). Who is in control of the international monetary system?. International Affairs, 86(3), 665-680.
