This development approach, by the European Union, is similar to the Bretton Woods institutions' 'Washington consensus', which was developed in the latter half of the 1980s, following "several severe balance of payments crises of developing countries" (Nienhaus, 2002, p. 55). The European Union does not favor indiscriminate opening of markets, but rather it looks for more liberal trade arrangements with developing countries and the European Union solely. This policy has been repeatedly criticized by the International Monetary Fund, the World Trade Organization, and World Bank.
The basic philosophy behind this position is that market forces are better able to foster economic development, compared to state intervention. If a developing country has prices which reflect the relative scarcity of goods and services, as well as indicate comparative advantages, these countries will be able to attract foreign investment. This investment will result in a transfer of both capital and technology. As Nienhaus (2002) notes, however, there are some preconditions that must be met.
The macroeconomic environment, according to the European Union, must be stable and predictable. This means inflation should be low. The country should have limited budget deficits. Also, real exchange rates should be stable. Additional preconditions include the removal of price distorting subsidies and regulations. The climate must also be conducive for both domestic and foreign private business. Reforms of commercial and tax laws may need to be made. Privatization and liberalization of the developing country's financial system should be underway. If these preconditions are met, per the European Union's policies, external trade liberalization would set effective prices and ensure that the scare resources are allocated efficiently, including especially scarce capital. When the inflow of foreign direct investment is added to the equation, the result should be enhanced production possibilities and exploitation of comparative advantages. As such, the European Union has had a significant effect on the economy of developing countries.
The European Union's Effect on the Economy of Developing Countries
As Nienhaus (2002) notes the global economy is an interconnected network of both individual nations and regional clusters of countries. These entities are interlinked through cross-border trade of goods and services, as well as movement of production factors, such as labor and capital, as well as financial flows. This interconnectedness began to blossom following World War II, but has been especially vigorous since the 1990s.
The collapse of Communism, along with a global political trend towards deregulation and liberalization, fueled globalization. Of course, there have been other periods in history where internationalization has occurred, such as the Industrial Revolution; however, the globalization that has occurred since the 1990s is markedly different. It wasn't until approximately two decades ago that the world saw a surge in internationalization through the use of production networks of transnational corporations. According to Nienhaus (2002), this has particularly affected developing countries, specifically through international trade and foreign direct investment. For those developing countries that are more advanced, integration into the global financial system as an 'emerging market' has also been critical in increasing globalization and has been significantly affected by the creation of the European Union.
The European Union is a significant importer of goods from developing countries. Nienhaus (2002) notes that one fourth of the imports from Latin America's regional trade organization go to European Union member nations. In addition, "almost 15% of the Asian ASEM countries' trade is with the European Union" (p. 51). The European Union has adopted policies of openness towards the least developed countries, making them a powerful player in their development. This is accentuated by the strong growth in European Union trade, with these countries, over the years.
Furthermore, the European region traditionally has run payments surpluses, which has made the European Union an important creditor and potential lender internationally, for developing countries. In 1997, according to Nienhaus (2002), 20% of outward stock of the European Union went to developing countries. These primarily included: Argentina, Brazil, China, Malaysia, Mexico, Saudi Arabia, and Singapore. Those receiving the lion's share of this investment were: China, Brazil, Mexico, and Singapore. However, despite this investment, with the creation of the European Union, the way some developing nations deal with Europe has changed dramatically, resulting in a lost competitive advantage.
The European Union has established a variety of cooperation and association agreements, with developing countries, over the years. This has "led to a very differentiated system of development cooperation" (Nienhaus, 2002, p. 55). Former European colonies in Africa, the Caribbean, and the Pacific (ACP countries) used to have privileged access to the European market, as well as access to financial support under the Lome Convention. However, with the establishment of the European Union, these benefits have eroded, as the transformation economies of Central and Eastern Europe have received similar or even better terms for their market access, through the policies established by the European Union. Other policies such as those aimed at upgrading the development of cooperation with non-European Union countries in the Southern Mediterranean further deteriorates the preferences ACP countries once enjoyed.
As noted, China is one of the largest developing countries receiving foreign direct investment from the European Union. This is not surprising when one considers China's international merchandise trade expanding at an annual average of 15%, over the last quarter century. This is more than double the global rate, according to Makin (2008). The country's average annual real GDP growth is approximately an astounding 10%, since the time of Deng Xiaoping's economic reforms began. Yet, despite the economic power of the European Union, China has been able to negatively affect the European Union's economy, as well as the global economy.
China's export grown has outpaced their import growth, since 2000. This has resulted in escalating trade and current account surpluses. As of 2008, Makin (2008) notes that China's account surplus was at a record 11% of their GDP, and has become a contention point between China and industrial trading partners, such as the European Union, who are experiencing bilateral trade deficits with China. Much of this concern is due to China's inflexible exchange rate of the yuan. This trade imbalance has resulted in a critical issue for not only the European Union, but the world as well, and demonstrates how despite being a consortium of 27 nations, the European Union is still not all powerful.
The increased globalization that has occurred over the last two decades has forever changed the way economies work. No longer are nations able to fully protect themselves from the effects of other nations economically. This is especially true for large economic forces, such as the European Union. Since 1993, the original 15 nation member conglomerate has grown to 27 countries, expanding from Western Europe further south and east. This powerful economic bloc has had a significant effect on the world's economy.
When considering global trade, the European Union is one of a Triad of economic powers in the world. Along with the United States and Japan, the European Union is one of the globe's top exporters, even when one excludes the transnational exportation of goods and services within the borders of the European Union. When it comes to foreign direct investment, the European Union too is a top global competitor. The consortium of countries is one of the world's leading foreign direct investors, with their outflow of foreign direct investment far surpassing that of their inflow of investment from other countries. These two factors have had a significant effect on the world's economy by increasing competition and placing a large amount economic power in the hands of the European Union. However, it is developing nations that have been most affected.
Twenty percent of the European Union's outflow of foreign direct investment has been to developing nations. Countries receiving the largest amount of investment include: China, Brazil, Mexico, and Singapore. However, not all developing nations have been positively affected by the emergence of the European Union. Former European colonies, ACP countries, have lost some of their competitive advantage due to new agreements the European Union has made with other developing countries. In addition, simply because the European Union has significant economic power, it does not mean it has full control of all aspects affecting the global economy, as can be seen in the case of China and the significant trade deficit the European Union has there, while their country has a trade surplus, due in part to the inflexibility of the Chinese yuan. One thing is certain, as the European Union continues to expand, it will increase its economic weight and effect they have on the world economy.
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