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The Politics of International Economic Relations

by Joan Spero and Jeffrey Hart


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Adjustment Policies: Macroeconomic policies aimed at enabling a country to adapt its structure of production to prevailing world conditions by ending imbalances in its economy and changing its structure. They usually involve cutting governmental expenditures to reduce imbalances in the external accounts (balance of payments) and the domestic budget; expanding the supply of tradeables to improve the balance of trade; and privatizing companies owned by the public sector.

Authoritarianism: A political system where the administration of government is centralized. The ruler's personality may play an important role in maintaining the system and advancing the notion and practice of extreme authority as a political virtue. It is characterized by the curtailment of individual freedoms; excessive reliance on actual, and the threat of, violence and punishment; virtual unaccountability of government officals; and the aversion of the decision-making process to consultation, persuasion and the necessity of forging a policy consensus.

Baker Plan: A plan introduced in September 1985 by U.S. Treasury Secretary James Baker to restore growth in the most heavily indebted countries. The proposed plan consisted of three parts: 1) the implementation of market-oriented structural changes to remove economic inefficiencies; 2) the provision of $20 billion in new loans over three years by commercial banks; and 3) an increase in the amount disbursed by multilateral development banks, particularly the International Bank for Reconstruction and Development, or World Bank. A host of factors prevented the Baker plan from achieving a resurgence of growth. Efforts to carry out structural reforms were limited by political constraints. Inadequate tax systems and demands on the banking system for debt financing undermined the success of the proposed economic reforms. Finally, slow growth in the developed countries constrained their ability to provide the financial inflows prescribed by the Plan.

Balance of Payments: An annual accounting of all economic transactions between one nation and the rest of the world. The balance of payments on current account includes the trade balance, which measures the movement of goods and some services; and the short-term capital account, which measures the flow of short-term investments and payments.

Brady Initiative: A strategy for dealing with LDC debt introduced in March 1989 by U.S. Treasury Secretary Nicholas Brady in the wake of the failure of the Baker Plan to achieve its objectives. The strategy called for a shift in emphasis from new lending to debt reduction by banks and called for making available the resources of multilateral development banks, such as the International Bank for Reconstruction and Development, or World Bank and the International Monetary Fund (IMF), to debtor countries that adopt sound economic reform policies. In terms of debt reduction, the Initiative proposed a menu of options that included voluntary exchanges of old debt for new bonds.

Bretton Woods Regime: The set of rules, institutions, and procedures developed to regulate international monetary interactions in the post-WWII period. It derived its name from the agreement forged in Bretton Woods, New Hampshire, in July 1944. This regime, which shaped the postwar international monetary relations until the United States' suspension of the convertibility of the dollar into gold in 1972, was founded on three political bases: the concentration of power in a small number of states, the existence of a cluster of important interests shared by those states, and the presence of a dominant power willing and able to assume a leading role. Bretton Woods participants set up the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), or World Bank, to manage exchange rates and ensure international liquidity and deter balance-of- payments crises.

Calvo Doctrine: An economic policy approach named after Carlos Calvo (1824-1906), an Argentine diplomat. The doctrine asserts the right of host countries to nationalize foreign investments and make their own determination of what constitutes fair compensation. As such, the Doctrine rejects the right of foreign investors to lay claim to diplomatic protection or to appeal to their home governments for help since this could ultimately result in violating the territorial sovereignty and judicial independence of the host nations. By the turn of the twentieth century, the Calvo Doctrine became the main guiding principle for the policies of Latin American countries toward multinational investment. With the shift in Souhtern public attitudes against multinational corporations in the 1970s, many of Southern governments adopted this Latin American position, thus altering their open-door policies.

Capital Formation: Capital formation occurs when a nation's capital stock increases as a result of new investments in physical capital (plant and equipment). Unlike gross capital formation, net capital formation makes allowances for depreciation and repairs of the existing capital stock. See also, Human Capital Formation, below.

Capital Goods: Capital goods are manufactured products that are used to produce other goods.

Capital Markets: A nation's capital market includes such financial institutions as banks, insurance companies, and stock exchanges that channel long-term investment funds to commercial and industrial borrowers. Unlike the money market, on which lending is ordinarily short term, the capital market typically finances fixed investments like those in buildings and machinery.

Capitalism: A socio-economic system characterized by private initiative and the private ownership of factors of production. In such a system individuals have the right to own and use wealth to earn income and to sell and purchase labor for wages. Furthermore, capitalism is predicated on a relative absence of governmental control of the economy. The function of regulating the economy is achieved largely through the operation of market forces, whereby the price mechanism acts as a signalling system which determines the allocation of resources and their uses.

Cartel: An organization of producers seeking to limit or eliminate competition among its members, most often by agreeing to restrict output to keep prices higher than would occur under competitive conditions. Cartels are inherently unstable because of the potential for producers to defect from the agreement and capture larger markets by selling at lower prices.

Central Bank: Foremost among its various functions, a central bank issues national currency, acts as banker to both government and private banks, and oversees the financial system. Central banks also administer national monetary policy, using their influence over the money supply and interest rates to implement macroeconomic policies.

Central Planning: The economic system adopted by Socialist countries. In this system, the processes of allocating resources, establishing production targets, and setting product prices are determined by government planners rather than the operation of market forces. Such a system discourages innovation, productivity, and quality. It provides little incentive for plant managers to experiment with new technology. The stress of fulfilling quantitative goals set by the state inhibits improving the quality of the product or the production process. The absence of competition and the existence of guaranteed markets eliminates incentives for managers to cut cost or improve quality. Above all, prices do not provide a guide to help managers determine what goods are needed by consumers and how to improve productivity by lowering costs.

Comparative Advantage: This doctrine, which received its first explicit formulation by the English economist David Ricardo (1772-1823), refers to the special ability of a country to produce a certain product or service relatively more cheaply than other products or services. Comparative advantage is determined by the relative abundance or lack of key factors of production (e.g., labor, land, and capital). It explains why a country that can afford to produce a wide range of products and services at a cheaper cost than any other country should concentrate on producing and trading in that product or service for which its cost advantage is greatest leaving the production of other products and services, in which it maintains a positive but lower cost advantage, to other countries which have comparative cost advantages in them. As such, the concept of comparative advantage is intimately pertinent to international trade theory. It provides rationales for both specialization on the part of countries and freedom of trade. Under a pure free-trade syetm, each country would use its resources optimally by specializing only in those goods and/or services that it can produce more efficiently while importing the rest.

Competitiveness: The ability of an entity to operate efficiently and productively in relation to other similar entities. Competitiveness has been used most recently to describe the overall economic performance of a nation, particularly its level of productivity, its ability to export its goods and services, and its maintenance of a high standard of living for its citizens.

Convertibility: An attribute of a currency which enables its holders to freely exchange it into another currency, or into gold. Under the pressure of certain international monetary crises, nations might resort to suspending the convertibility of their currencies in order to ensure that holders of their currency will spend it in the country which issued it.

Customs Union: A customs union is formed when two or more countries agree to remove all barriers to free trade with each other, while establishing a common external tariff against other nations. A free-trade area exists when nations remove trade barriers with each other while retaining individual tariffs against non-members.

Debt Crisis: The heavy borrowing of many newly industrializing countries, particularly those in Latin America that resulted in a prolonged financial crisis as evidence mounted indicating that some debtor nations might not be fail to continue making payments on their loans. The crisis was triggered in the summer of 1982 when a number of highly indebted nations, including Mexico, Brazil, Argentina, and Poland, announced that they did not have the cash liquidity necessary to pay their creditors and, hence, raised the specter of defaulting on their loans. The debt crisis posed a threat not only to the development and political stability of the indebted nations but also to the international financial system itself.

Debt Rescheduling (Debt Restructuring): Debt rescheduling (debt restructuring) occurs when a borrower and a lender renegotiate the original terms of a loan, altering the payment schedule or debt-service charges. This usually occurs when debtor nations cannot meet the payments due on loans from creditors. Debt Service: Debt service is the total amount of principal and interest due on a loan in a given period.

Deficit: A national budget deficit occurs when a country's public spending exceeds government revenues. A current account deficit exists when exports and financial inflows from private and official transfers are worth less than the value of imports and transfer outflows. A trade deficit occurs when imports of goods and services exceed exports.

Democracy: Literally, the term means power of the people (combining the Greek words demos, meaning "the people," and kratien, meaning "to rule"). It is usually used to describe a political system where the legitimacy of exercising power stems from the consent of the people. Accordingly, a democratic polity is often identified by the existence of constitutional government, where the power of the leaders is checked and restrained; representative institutions based on free elections, which provide a procedural framework for the delegation of power by the people; competitive parties, in which the ruling majority respects and guarantees the rights of minrities; and civil liberties, such as freedoms of speech, press, association, and religion.

Dependency Theory: A theory that argues that, due to the exploitative nature of the relationship between advanced capitalist societies and the Third World, the development of the former resulted in the underdevelopment of the latter. Because of its reliance on external sources of demand and investment opportunities, Western capitalism penetrated virtually all parts of the Third World and eventually laid down the foundations of dominance-dependence relationship structures between North and South which tended to engender and perpetuate underdevelopment in the Third World. According to this theory, exchanges between the North and the South, such as trade, foreign investment, and aid, are asymmetric and tend to stifle the development of the latter and to reinforce their dependence. The theory also contends that local elites with vested interest in the structure of dominance and in monopolizing domestic power cooperate with international capitalist elites to perpetuate the international capitalist system.

Depression: A depression is a prolonged and severe decline in national business activity, ordinarily occurring over several fiscal years. Depressions are characterized by sharply falling rates of production and capital investment; by the rapid contraction of credit; and by mass unemployment and high rates of business failure.

Dumping: The practice of selling goods abroad below their normal market value or below the price charged for the same goods in the domestic market of the exporting country. Dumping can be a predatory trade practice whereby the international market, or a certain national market, is flooded with dumped goods in order to force competitors out of the market and establish a monopoly position. Oftentimes, government subsidies are used to help absorb temporarily the losses caused by predation, leading to friction among trade partners. Dumping and predation are considered to be unfair trade practices and, as such, are prohibited under many national trade laws. The most common antidumping measure is an added import duty calculated to offset the "dumping margin," that is, the discrepancy between home price or cost and the export price.

Economic Development: The process of raising the level of prosperity and material living in a society through increasing the productivity and efficiency of its economy. In less industrialized regions, this process is believed to be achieved by an increase in industrial production and a relative decline in the importance of agricultural production.

Economic Efficiency: Economically efficient production is organized to minimize the ratio of inputs to outputs. Production is economically efficient when goods are produced at minimum cost in money and resources. This typically occurs where input prices are used to find the least-expensive production process.

Economic Nationalism: The set of practices that dominated international economic interactions during the interwar years and which eventually brought about the collapse of the international monetary system in the 1930s. Foremost among these practices are: instituting competitive exchange rate devaluations, formation of competing monetary blocs, adoption of beggar-thy-neighbor trade policies, and aversion to the norms of international cooperation.

Eurocurrencies: Currencies held outside their country of issue, such as dollars deposited in banks outside the United States, mostly in Europe (Eurodollars). Eurocurrency markets are generally free from most national controls, so they are a flexible outlet for deposits and a source of loans for major international corporations and for national governments. This is also true of Eurobonds, or securities issued on loosely controlled international markets.

European Economic Community: An economic bloc that was founded in 1957 when the Treaty of Rome agreed to by the six countries of Belgium, France, Italy, Luxemburg, the Netherlands, and West Germany. Its current membership has increased to fifteen. The organization is now called the European Union. The signatories of the Treaty of Rome agreed to work for the gradual formation of a full customs union; the elimination of all barriers to the free movement of capital, labor and services; and the harmonization of agricultural, industrial, trade and transportation policies.

Exchange Rate: The price of a currency expressed in terms of other currencies or gold. Fixed exchange rates prevail when governments agree to maintain the value of their currencies at pre-established levels. This is also known as maintaining parity. Floating exchange rates allow the market to determine the ralative value of currencies.

Exon-Florio Amendment: An amendment to the Omnibus Trade Bill of 1988 named after its sponsors Senator J. James Exon and Representative James J. Florio. It extends the scope of the International Investment and Trade in Services Act (IITSA) of 1976, which established a mechanism to monitor foreign investment in the United States, to prohibit mergers, acquisitions, or takeovers of American firms by foreign interests when such actions are deemed injurious to the national security of the United States.

Export-Oriented Development (Export-Led Growth): A development strategy designed to expand the overseas markets for a country's manufactured products by improving their competitivity abroad; that is, by developing and enhancing domestic export industries. The mainstay of export-oriented development does not lie in eliminating all protection. Rather, it is based on eliminating the bias against exports: maintaining realistic exchange rates that did not discriminate against exports; reducing import barriers for inputs to the export sector; as well as removing any other export disincentives such as export taxes. In many countries, export-led growth involves government promotion of exports through favorable credit terms for exporters, tax incentives, undervalued exchange rates that decrease export prices, encouragement of foreign investment in export industries, and direct subsidies for targeted sectors.

External Indebtedness: A nation's external indebtedness is the total amount of money owed by the government to lenders outside the country.

Factor Endowment: A nation's factor endowment is its original share of the inputs needed to produce other commodities. These inputs or factors of production are broadly classified into land, labor, capital, and entrepreneurship. The availability of these factors of production helps set the price for and determine the supply of commodities produced for domestic use and for international trade.

Factors of Production: Economic resources or inputs which are employed in the process of production. These are usually divided into two main categories: human resources and non-human resources. Human resources include two main composites: labor, which includes all human physical and mental talents and efforts employed in producing goods, such as manual labor, managerial and professional skills, etc; and entrepreneurship or entrepreneurial organization, which encompasses everything that facilitates the organization of the other composite factors for productive purposes, such as innovation, risk-taking, and applications analysis. Non-human resources include two other composites: land, which includes the entire stock of a nation's natural resources such as territory, mineral deposits, forests, airspace, territorial waters, water power, wind power, and the like; and capital, which includes all man-made aids to production, such as buildings, machinery, and transportation facilities.

Fast Track Negotiating Authority: The congressional delegation of negotiating authority to the president of the United States in the area of reducing tariffs by specific amounts without subsequent congressional approval. The practice, which was begun in 1934 to avoid the pressure of special interest groups for protection, was used during the Tokyo and Uruguay Rounds of the multilateral trade negotiations under the GATT and during the negotiations for the North American Free Trade Agreement (NAFTA).

Fiscal Policies: An outgrowth of Keynesian economics, fiscal policies refer to the use of government tax and spending policies to achieve desired macroeconomic goals. Accordingly, they involve discretionary efforts to adjust governmental tax and spending to induce changes in economic incentives and, hence, to stabilize fluctuations in aggregate demand. These discretionary adjustments in the government tax and spending levels are believd to effect desired changes in aggregate demand; to manipulate subsequent levels of employment, disposable income, consumption and economic activity; and to smooth fluctuations in nominal gross national product (GNP). Fiscal policies could be stimulative and expansionary, or contractionary and restrictive. As such, a budget deficit or a tax cut is considered to be stimulative (i.e., providing a fiscal stimulus) because it is believed to generate a rise in national wealth and investment. Whereas a budget surplus achieved by raising taxes is considered to be contractionary because it is believed to reduce aggregate demand.

Foreign Direct Investment (FDI): Financial transfers by a multinational corporation from the country of the parent firm to the country of the host firm to finance a portion of its overseas operations. Foreign direct investment occurs when a corporation headquartered in one nation invests in a corporation located in another nation, either by purchasing an existing enterprise or by providing capital to start a new one. In portfolio investment, on the other hand, foreign investors purchase the stock or bonds of national corporations, but do not control those corporations directly.

Free Trade: Free trade exists when the international exchange of goods is neither restricted nor encouraged by government-imposed trade barriers. Subsequently, the determination of the distribution and level of international trade is left to the operation of market forces.

Generalized System of Preferences (GSP): An arrangement that was introduced and negotiated under the auspices of UNCTAD. According to this agreement, a preferential tariff treatment is granted by Northern states to manufactured and semi-manufactured products imported from developing countries. This system was designed to increase the export earnings and to promote the economic growth and industrialization of developing countries.

Glasnost (Openness): A domestic initiative of political reform introduced by Soviet president Mikhail Gorbachev in the mid-1980s to allow more freedom in public discussion and the arts, and to foster the process of the democratization of the political process.

Gold Standard: An international monetary system in which the value of a currency is fixed in terms of gold. A government whose currency is on the gold standard agrees to convert it to gold at a pre-established price. This creates a self-regulating mechanism for adjusting the balance of payments, since disequilibria can be remedied by inflows and outflows of gold.

Gross National Product (GNP): The monetary value of a nation's total output of goods and services, usually over a year. Gross national product at factor cost is based on the total earnings of all national factors of production (wages, rent, interest, profits). Gross national product at market cost is computed by adding total national expenditures on consumption, foreign and domestic invesment, and government spending on goods and services. Unlike net national product (NNP), gross national product makes no deductions for depreciation of the machinery used for production.

Hard Currencies: Freely convertible currencies that can be used to finance international trade, such as those held in national foreign exchange reserves, are called hard currencies. Soft currencies, on the other hand, are not freely convertible and are not held as reserve currencies.

Human Capital Formation: Investment in education and research which results in an improvement in human skills and knowledge.

Hyperinflation: A rapidly accelerating rate of inflation which is perilous to a country's economy because it undermines the ability of its currency to perform its traditional functions (i.e., standard of value, store of value, and reliable medium of exchange), and occasions a shift in the ultilization of the nation's resources from productive efforts toward speculation. Hyperinflation could cause a high exponential rise in prices in as short a period as a single month.

Import-Substituting Industrialization (ISI): An inward-looking development strategy designed to reduce imports by setting up domestic industries behind protective walls to produce previously imported products. The strategy involves the adoption of protectionist trade policies (import tariffs, quantitative controls, multiple exchange rates, etc.) to allow "infant" industries to develop and grow, and encouraging the flow of foreign direct investment especially in manufacturing. Once the infant stage was completed, protection could be removed and free trade resumed. Typically, ISI starts with the production of consumer goods in the hope of moving to intermediate goods and then to capital goods in the future. In most cases, the strategy fails to generate capital savings sufficient to finance the transition from producing one type of goods to another. The reason is that substitution in the area of consumer durables usually leads to the expansion of imports in the areas of intermediate and capital goods needed for the production of the consumer goods. ISI also tends to create industries which are not internationally competitive while at the same time weakening traditional exports.

Infant Industry: An industry in its early stages of development which cannot withstand competition from overseas competitors. It is usually argued that in order to guarantee the success and growth of such an industry, tariffs, import quotas and other barriers to international trade need to be imposed so as to provide the industry with protection from international competition and to allow it to achieve cost competitiveness by exploiting economies of scale and employing new, productivity-enhancing technolgoies. The industry is believed to grow out of the infantile stage when it is able to to compete with foreign competitors in a system of free trade.

Inflation: A persistent upward movement in the general price of goods and services that ordinarily results in a decline of the purchasing power of a nation's currency. Inflation resulting from government action to stimulate the economy is known as reflation. Disinflation is a downward movement of wages and prices that erases the effects of a previous round of price increases. Price inflation is most likely to set in under either one (or a combination) of the following conditions: 1) an increase in demand at a time when supply of labor is tight and industrial capacity is fully utilized; 2) a lack of congruence between increases in wage rates and increases in productivity; 3) a sharp decline in the sources of supply; and 4) a rise in money supply faster than output increases.

Infrastructure: A nation's infrastructure consists of the communications networks, transportation systems, and public services needed to conduct business. These are often considered to be public or collective goods because individuals and firms will not supply them in adequate quantities and they are, as a result, at least partly financed with public funds and are therefore often subject to government regulation. Social infrastructure refers to such human services as education and health care that affect the quality of the work force.

Interdependence: A relationship of mutual dependence characterized by mutual sensitivity and mutual vulnerability on the part of all the parties involved. As such, managing interdependence requires the coordination of national economic policies and the observance of some international discipline in the formulation of policies that have always been the prerogative of national governments. Economic interdependence has led to the growing convergence of the economies of developed countries. The rapid accumulation of physical and human capital, the transfer of technology, and the growing similarities of wages have narrowed the differences in factor endowments, which are the basis for comparative advantage and trade.

Interest Rate: The cost of money which fluctuates (rises and falls) in correspondence with changes in the demand for and supply of money. Moreover, the interest rate varies over the length of loan or deposit as well as the type of financial instrument.

Intermediate Inputs: Intermediate inputs are goods, like steel, that are used to produce finished products or final goods, like automobiles. The value of intermediate inputs is not counted directly in calculating gross national product (GNP). Demand for these inputs (derived demand) is related to demand for the final goods they help to produce.

Intellectual Property: Property rights granted to creators of inventions or ideas embodied in products or production technologies for the purpose of promoting creativity in the arts and innovation in the economy. Legally-sanctioned intellectual property rights include patents, copyrights, trademarks, and semiconductor chip designs. These property rights generally grant their holders a temporary monopoly for the sale of the right to use the item in question, allowing them to fix whatever price they deem adequate compensation for their creative efforts.

Internalization Theory: A theory advanced to explain why firms may prefer direct foreign investment to alternative ways of doing business like exporting and licensing. OLI theory contends that firms expand abroad in order to internalize activities in the presence of transaction costs arising from market imperfections just as they expand domestically for similar reasons. Since it is generally less expensive for local firms to conduct business activities in their home markets than for foreign firms, the extra costs connected with doing business abroad must be offset by advantages that a particular foreign firm may have (such as managerial or marketing techniques or new production processes). Because knowledge is a public good, a firm's profits from developing that knowledge cannot be optimized if the firm resorts to such open market practices as exporting or licensing. Consequently, the firm internalizes the market by setting up a foreign subsidiary that can ensure maximum control over the use of that knowledge.

International Bank for Reconstruction and Development (IBRD): A public international organization created by the Bretton Woods agreement to facilitate the postwar economic recovery. With capital provided by member states, the IBRD (also known as the World Bank) sought to achieve its objectives by extending loans at market rates to cover foreign exchange needs of borrowing countries, thus making possible a speedy postwar recovery and promoting economic development. Currently, the IBRD is the world's foremost intergovernmental organization involved in the external financing of projects aimed at fostering the economic growth of developing vountries.

International Commodity Agreements (ICAs): These are accords between producers and consumers aimed at stabilizing or increasing the price of particular products. ICAs may be of three types or combinations thereof: buffer-stock schemes, whereby price is managed by purchases or sales from a central fund at times of excessive fluctuation; export quotas, whereby price is managed by assigning production quotas to participating countries in order to control supply; and multilateral contracts, whereby the importing countries sign contracts commiting them to buy certain quantities at a specified low price when the world market falls below that price and the exporting countries agree to sell cetrain quantities at a fixed price when the world market price exceeds the maximun.

International Monetary Fund (IMF): A public international organization created by the Bretton Woods agreement as the main instrument of international monetary management. The IMF helps countries with payments deficits by advancing credits to them. Originally, its approval was made necessary for any change in exchange rates. It advises countries on policies affecting the monetary system. The IMF is provided with a fund composed of member countries' contributions in gold and in their own currencies. The system of weighted voting allows the United States to exert a preponderant influence in this body.

Intervention: Actions taken on the part of one or more central banks in order to influence exchange rates. Since the move to a system of floating rates, the Group of Five (G-5), the United States, Japan, France, Germany, and Britain, has attempted to coordinate intervention in currency markets, usually by buying and selling currency, to achieve target rates.

Invisible Hand Doctrine: Coined by Adam Smith in his pioneering book Inquiry into the Nature and Causes of the Wealth of Nations (1776), the term is used as a rationale for laissez faire as the best policy for the government to pursue in the economic sphere. The doctrine argues that, in their quest to advance their self-interests, individuals are led, as if by an invisible hand, to achieve the best good for all. Accordingly, government intervention in the economy would distort the automatic, self-adjusting nature of economic life. Competition among individuals inspired by their selfish motives will automatically further the best interests of society as a whole.

Isolationism: A foreign policy doctrine that calls for the curtailment of a nation's international relations and the avoidance of entangling alliances. Isolationism constituted a key plank in the U.S. foreign policy approach, with a few short periods of abberation, between the War of Independence and World War II. This foreign policy of nonentanglement was made possible mainly by the geopolitical detachment of the United States. The ratification of the United Nations Charter by the Congress in 1945, which inaugurated an era of internationalism in U.S. foreign policy, brought to an effective end the era of isolationism where the United States avoided incurring any binding political obligations to other nations. In fact, modern trade, communications technologies, and military weapons make isolationism a virtual impossibility for any nation in our time.

Keiretsu: Japanese business confederations composed of allied financial and industrial companies. As part of their keiretsu obligations, Japanese companies usually hold each other's stocks. The keiretsu system can be an effective barrier to foreign investment by making it difficult for a foreign firm to acquire a firm which is a member of a keiretsu.

Keynesianism: A school of economics inspired by the theoretical contributions of John Maynard Keynes (1883-1946), an English economist. Keynes argued that government spending and investment function as means of disbursing purchasing power into the economy and, hence, affect the demand for consumer goods in the same way as private investment. He suggested increasing government expenditures during deflationary periods and decreasing it during inflationary periods as a means of manipulating aggregate spending and income. By prescribing governmental intervention to maintain adequate levels of employment, Keynesianism paved they way for the growth of the welfare state in the wake of the Great Depression.

Liberalism: A school of economics that relies primarily on a free market with the minimum of barriers to the flow of private trade and capital. Underdevelopment in the Third World, acording to this school, stems from certain domestic economic policies of the developing country which tend to accentuate market imperfections; reduce productivity of land, labor, and capital; and intensify social and political regidities. The adoption of market-oriented domestic policies is the optimal way to remedy these weaknesses.

Locomotive Theory: An economic theory that calls for coordinating national economic policies and prescribes that countries with payments surpluses to follow expansionary policies that would serve as engines of growth for the rest of the world. It was adopted by the Carter administration in the late-1970s as the basis of the United States strategy for global economic growth.

Macroeconomics: Macroeconomics is the branch of economics that analyzes patterns of change in aggregate economic indicators such as national product, the money supply, and the balance of payments. Governments attempt to influence these indicators by implementing macroeconomic policies.

Managed Trade: Managed trade regimes arise when industrialized countries adopt industrial policies domestically -- forms of government intervention designed to shift comparative advantages within countries toward high value-added and/or high technology production -- and then modify existing international trade regimes to prevent the use of such industrial policies as a new form of protectionism. An example of this is the U.S.-Japanese Semiconductor Trade Agreement of 1986.

Market Forces: The dynamic occurring when competition among firms determines the outcome in a given situation, and a supply-and-demand equilibrium is reached without government intervention.

Marshall Plan (European Recovery Program): An American program of grants and loans instituted to assist the recovery of Western Europe after WWII. The program had two main objectives: to prevent the occurrence of a collapse in the international economic system similar to the one which occurred during the interwar period; and to prevent the formation of communist systems in Western European countries. It eventually became the tool of U.S. leadership in Europe as it allowed the United States to play a key role in financing international trade, encouraging European trade competitiveness, and fostering regional trade liberalization in Europe.

Marxism (and Neo-Marxism): A school of thought inspired by the theoretical and philosophical formulations of Karl Marx. The fundamental component of the economic dimension of Marxism is predicated on the surplus value theory. Marx argued that under a capitalist system the value of commodities depends on the labor that is put into producing them. However, workers are paid only a small proportion of that value, sufficient to enable them to pay only for the goods necessary to maintain their average consumption. The difference between the actual value of the labor exerted by the workers and the wages that they receive is the surplus value, which is the source of all profits, rent, and interest income that goes to the owners of capital. The system inevitably produces poverty by underpaying workers and overpaying capitalists. It is also vulnerable to periodic economic depressions and unemployment which exacerbate poverty. Marxism (and neo-Marxism) also maintains that the imperialist drive to dominate and exploit Third World countries is intrinsic to capitalism. Accordingly, the theory argues that Third World countries are poor and exploited because of their history as subordinate elements in the world capitalist system. This condition will persist as long as they remain part of that system. As such, the only appropriate strategy for Third World development is revolutionary: the obliteration of the world capitalist system and its replacement with an international socialist system.

Mercantilism: Originated in the seventeenth century, when certain trading states made it their goal to accumulate national economic wealth and, in turn, national power by expanding exports and limiting imports. Some analysts and policymakers have charged that countries pursuing protectionist trade policies in the twentieth century are following a similar strategy which they termed neo-mercantilism.

Microeconomics: Microeconomics is the branch of economics that analyzes the market behavior of individual consumers and firms. The interaction of these individual decision-makers creates patterns of supply and demand that fix the prices of goods and factors of production and determine how resources will be allocated among competing uses.

Monetary Policies (Monetarism): Policies designed to manage the size of the nation's money supply in a manner which fosters investment and economic growth. These policies are usually inspired by the monetarist theory that attributes economic instability to disturbances in the monetary sector. Monetary policies, therefore, attempt to influence variables like the balance of payments, currency exchange rates, inflation, and employment by increasing or decreasing interest rates and controlling the money supply.

Monopoly: A market structure with only a single seller of a commodity or service dealing with a large number of buyers which results in closing entry into the industry to potential competitors. Consequently, due to the absence of a competitive supply of goods on the market, the seller usually has complete control over the quantity of goods released into the market and the ability to set the price at which they are sold. This results in a lower level of production and a higher price than would occur under more competitive market conditions.

Monopsony: A market structure with only a single buyer of a product who is able, therefore, to set the buying price. The classic examples include the demand for labor in a one-company town and the purchase of all output from certain mines by a large manufacturer.

Most Favored Nation (MFN): The GATT principle which stipulates that "any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties." It is a guarantee of nondiscrimination or equal treatment in trade relations.

Multinational Corporation (MNC): A multinational corporation is a business enterprise that retains direct investments overseas and that maintains value-added holdings in more than one country. A firm is not really multinational if it just engages in overseas trade or as a contractor to foreign firms. A multinational firm sends abroad a package of capital, technology, managerial talent, and marketing skills to carry out production in foreign countries.

National Treatment: A GATT rule designed to prevent discrimination against foreign products after they enter a country. It requires countries to give imports the same treatment as they give products made domestically in such areas as taxation, regulation, transportation, and distribution. It also requires them to treat foreign-owned enterprises no less favorably than domestically-owned ones.

New International Economic Order (NIEO): The view advocated by the less-developed and developing countries mainly in the 1970s which argued that the open monetary, trade, and financial system perpetuated their underdevelopment and subordination to the developed countries. They called for the dismantling of the Western-dominated international economic order and its replacement with a new international economic regime that better serves the interests of Third World countries. They also sought a North-South dialogue on issues ranging from transfer of technology and capital, to redistribution of global economic benefits, to rapid economic development in the South.

Newly Industrializing Countries (NICs): Countries that have a high level of economic growth and export expansion, outpacing the less- developed countries but not as industrialized as the developed countries. Middle-income countries like Mexico, Brazil, and Portugal are considered NICs, as are the Four Tigers: Hong Kong, Singapore, South Korea, and Taiwan. Government policies played a central role in the initial stages of industrialization in the NICs. Targeted industries were promoted through import protection, tax incentives and subsidies.

Nomenklatura: A Soviet institution which was designed to preserve the dominant role of the Communist Party by giving out responsible positions to those loyal to the regime. Started by Stalin, nomenklatrura included a list of positions in all levels of government and society that the government or the Communist Party controlled. It was used as a reward system to attract people to the Communist Party and to maintain Party discipline.

Nonconcessional Loans: Nonconcessional loans, or "hard loans," are offered on terms set by the market, so that interest rates and payment schedules are determined by the relative supply of investment funds. Concessional loans, or "soft loans," are offered on terms more generous than those prevailing in the market.

Nontariff Barriers (NTBs): These are measures designed to discriminate against imports, without levying taxes directly on merchandise, or offer assistance to exports and thus have trade-distorting consequences. They include quotas, by which government determines the amount of a commodity that can be imported, procurement policies, customs procedures, agricultural policies, health and sanitary regulations, national consumer and environmental standards, voluntary restraint agreements (VRAs), and a broad range of other laws and regulations that insulate the domestic economy from international competition. The success of the GATT in removing quotas and tariffs had the unintended consequence of the emergence of "the new protectionism" through an increase in the use of nontariff barriers. Unlike the regulation and removal of quotas and tariffs, NTBs do not lend themselves easily to international control. They are usually an integral part of national economic and social policies and, as such, are considered national prerogatives beyond the scope of international regulation.

Obsolescing Bargain Theory: A theory advanced to explain the dynamics of the activities of multinational corporations. The theory contends that the firm's initial good bargaining position, stemming from such advantages as superior technology, vis--vis the host country's government encourages it to invest in foreign countries. However, once the firm has made an investment, the bargaining advantage may slowly shift to the host country. The host country will then attempt to negotiate more favorable terms with the foreign investor. That is so because the technology may mature and become more easily accessible to the host country's firms, and the host country may learn how to gain better access to global capital and final product markets.

Oligopoly: An oligopoly exists when a few companies dominate an industry. This concentration often leads to collusion among manufacturers, so that prices are set by agreement rather than by the operation of the supply and demand mechanism. For an oligopoly to exist, the few companies do not need to control all the production or sale of a particular commodity or service. They only need to control a significant share of the total production or sales. As in a monopoly, an oligopoly can persist only if there are significant barriers to entry to new competitors. Obviously, the presence of relatively few firms in an industry does not negate the existence of competition. The existing few firms may still act independently even while they collude on prices. In an oligopolistic market, competition often takes the form of increased spending on marketing and advertising to win brand loyalty rather than on reducing prices or increasing the quality of products.

Oligopoly Theory: A theory proposed to explain the genesis of multinational investments. The theory argues that firms are prompted to move abroad by their desire to exploit the market power they possess through control over such factors as unique products, marketing expertise, control of technology and managerial skills, or access to capital. The oligopolistic competition for global market shares makes firms match each other's moves in entering new foreign markets.

Perestroika (Restructuring): An economic initiative launched by Soviet president Mikhail Gorbachev in the mid-1980s in an attempt to move the Soviet economy in the market direction and to open up trade, finance, and investment relations with the West. The initiative envisioned the decentralization of industrial decision making from central planners to individual firms; the creation of financial markets to determine capital flows; scrapping the system of centralized supply and replacing it by a wholesale distribution system; and improving trade and financial interactions with the West. Because perestroika was implemented in a halting and ultimately unsuccessful manner, it had the unintended consequence of hastening the decline of the Soviet economy and ultimately helped bring about the breakup of the Soviet empire.

Predatory Pricing: The practice of allowing the prices of goods produced by a firm to decline to unprofitable levels in order to underprice other firms and, in turn, increase the firm's market share or drive its competitors completely out of the market. This unfair practice is usually characteristic of a large multiproduct and/or multimarket firm which can offset its losses in one product or market with profits made from other products or in other markets.

Price Supports: Price supports are a form of government subsidy for the production of commodities. The market price of certain goods is fixed at a level that guarantees the producer an "adequate" return on investment. That price is not determined by the free interaction of supply and demand, but rather by government regulators, and often the government purchases surpluses that remain unsold at an artificially high fixed price. (See also Subsidies).

Primary Products: Unprocessed or partially processed goods, often used to produce other goods. They include agricultural commodities like grain and vegetables, and raw materials like iron ore and crude petroleum.

Principal Supplier Procedure: A GATT negotiating rule which requires negotiations to take place among actual or potential "principal suppliers:" where the latter are defined as nations accounting for 10 percent or more of a given product in world trade.

Product Cycle Theory: A theory advanced to explain the tendency of multinational companies to move from exporting to undertaking foreign direct investments in overseas production to service foreign demand. The theory argues that firms invest abroad when their main products become "mature" in domestic markets. As the initial high-growth stage of domestic product commercialization ends and the domestic market becomes saturated (growth in demand slows down and new competitors arise), the firm begins to look for new sources of demand abroad in order to maintain its growth. This is achieved by establishing foreign subsidiaries with lower costs so that the firm can remain competitive in its home market while also improving its access to foreign markets.

Productivity: Productivity is the amount of product created by one unit of a given factor of production over a stated period of time. Productivity expresses the marginal relationship of inputs to outputs and measures the economic efficiency of production. Productivity indicators ordinarily relate output to a single factor of production, creating measures like labor productivity, capital productivity, and land productivity. Measures of multifactor productivity, in contrast, combine productivity indicators for multiple factors of production (labor and capital, for example) to produce a single overall measure of productivity growth.

Protectionism: The use of import tariffs, import licenses, quota restrictions on imports, and other nontariff barriers to protect local industry from competition with imported goods and services.

Recession: A short-term decline in national business activity, usually lasting for at least three consecutive quarters of a fiscal year. Recessions are characterized by rising unemployment rates and falling rates of production, capital investment, and economic growth, but these declines are not as severe nor as persistent as those that occur in depressions.

Reciprocity: The practice of offering trade concessions, such as tariff reductions, by one country in return for similar concessions by other countries. Reciprocal agreements help countries to avoid any likely balance-of-payment deficits inherent in unilateral tariff reductions. They also have the advantage of being politically feasible, since the trade concessions can be billed by the government as being more advantageous to its country's interests than to those of the other country.

Rent: Earnings that can accrue to a unique factor of production in excess of the amount which that factor could earn in its next best alternative employment. An example of this is the case of a trained doctor who can earn $100,000 per year. If he could not earn his living practicing medicine, his next best alternative career, for example nursing, would earn him $24,000 per year. His economic rent, therefore, is $76,000.

Research and Development (R&D): Research and development includes all systematic or organized efforts aimed at the formation or advancement of knowledge and applying that knowledge to the development of new products and production processes as well as to the improvement and refinement of existing products and production processes. It encompasses activities that can be divided into three groupings: basic research, applied research, and development. Basic research refers to efforts aimed at expanding knowledge in the sciences, both natural and social. Applied research aims at the formulation of engineering concepts and methods as well as the invention of machines and techniques that can be used as inputs in the process of production. Development is the process of refining and perfecting a new kind of product or activity in order to facilitate the mass production and/or commercialization of the new product or activity. Usually both governmental and private (business as well as non-profit) institutions share the responsibility of undertaking basic research.

Reserve Currency: Reserve currencies are held by governments and institutions outside the country of issue and are used to finance international economic transactions, including trade and the payment of debts. Stable, easily convertible currencies issued by major trading nations like the United States, Germany, and Japan are generally included in national reserves.

Revaluation: Revaluation is a change in the official rate at which one currency is exchanged for another or for gold. Devaluation reduces the relative value of the currency and creates a mechanism for adjusting balance of payments deficits, since it lowers the price of exports abroad and raises the price of imports at home. This mechanism will not function during periods of competitive devaluation when the devaluation of one currency causes other nations to follow suit.

Services: Economic activities that are intangible, such as banking, tourism, insurance, and accounting, in contrast to goods that are tangible, such as automobiles and wheat. Services account for an ever-increasing part of the trade of the industrialized countries.

Socialism: An economic and political system in which private property is abolished and the means of production (i.e., capital and land) are collectively owned and operated by the community as a whole in order to advance the interests of all. In Marxist ideology, socialism is considered an intermediate stage in the inevitable transformation of capitalism into communism. A socialist society is envisioned as being characterized by the dictatorship of the proletariat; the existence of a high degree of cooperation and equality; and the absence of discrimination, poverty, exploitation, and war. With the non-existence of private ownership, the private profit motive is eliminated from economic life. Consequently, market forces do not play a role in organizing the process of production. Instead, large-scale government planning is employed to ensure the harmonious operation of the process of production.

Sovereignty: The principle that the state exercises absolute power over its territory, sytem of government, and population. Accordingly, the internal authority of the state supercedes that of all other bodies, both inside and outside its territories; and the state emerges as the ultimate arbiter of its grievances vis--vis others. Sovereignty theoretically preserves the territorial inviolability of the state and its independence from outside authorities. In practice, the sovereignty of smaller and weaker states is limited and even the larger and stronger states confront a world in which various forms of interdependence, economic and otherwise, diminish their claims to a territorial monopoly of control. In addition, international law and international regimes (like the GATT) limit the exercise of sovereignty by those states that recognize their utility. This does not prevent governments from cherishing the idea of national sovereignty, however.

Spot Market: Commodities exchanged on the spot market sell at prices fixed by supply and demand at the time of sale. The forward market, on the other hand, exchanges promises to buy or sell commodities in the future at a pre-established "forward" price.

Stabilization Programs: Deflationary policy packages designed to reduce a country's trade deficit as well as imbalances in its balance of payments and domestic resource use by cutting down the levels of public and private expenditures.

Stagflation: An economic downturn characterized by the simultaneous existence of stagnation and persistent and intractable inflation. In the light of conventional economic theory, the condition of stagnation is puzzling since each of the above two conditions (i.e., stagnation and inflation) is considered a correction for the other. For instance, the phenomenon of inflation, which is caused by the existence of an excess of money pursuing too few goods in the market, is usually considered a spur for slack demand. The simultaneous existence of slack demand and rising prices is usually explained by the rigidity of prices in modern economies. The downward inflexibility of prices in modern economies occasioned mainly by the attitudes of resistance on the part of workers and company management to lessened growth and to cuts in wages and prices, makes any economic slowdown less effective in curtailing price rises than is expected by coventional economic analysis.

Stagnation: The utilization of an economy's resources below their potential. Stagnation might occur for two reasons: 1) the growth of the rate of output below the rate of population growth; and 2) the existence of insufficient aggregate demand that may prevent an economy from achieving its potential despite its capacity for sufficient growth.

Structuralism: A school of thought that contends that the international market structure perpetuates backwardness and dependency in the Third World and fosters dominance by the developed countries. As such, unregulated international trade accentuates international inequalities, due to the declining terms of trade for the South, and creates a dual economy by giving rise to an export sector that has little effect on the rest of the economy. Foreign investment in the South leads to a net flow of capital to the developed North and tends to concentrate in export sectors, thereby aggravating the dual economy and the negative effects of trade. However, unlike Marxism and Neo-Marxism which argue that the international system is immutable, structuralism argues that the system is amenable to reform. Rather than prescribing a socialist revolution, the structuralist prescription for promoting economic development in the South focuses on four types of policy changes: 1) import-substituting industrialization; 2) increased South-South trade and investment; 3) regional integration; and 4) population control.

Subsidies: Grants of money made to either a seller or a buyer of a certain product or service, thereby altering the price or cost of that particular product or service to the recipient of the subsidy in a way which affects the output. Governments usually make payments to domestic producers to offset partially their costs of producing and selling certain goods and services. Subsidies are commonly used to support infant firms just entering a new market, and to bail out older firms suffering from intensified competition. Subsidies are also used to promote the development of high technology industries, even when these are questionable candidates for "infant industry" status.

Supply-Side Economics: A school of economics which holds that decreasing impediments to the supply and efficient use of factors of production, such as reductions in the tax rates, increases incentives and shifts the aggregate supply curve. Hence, supply-side economists argue that since taxation and government regulation "crowd out" investment, taxes and government regulations ought to be reduced in an effort to stimulate savings, investment, and growth.

Tariff: Tariff barriers are taxes imposed on commodity imports based either on the value of the good or on a fixed price per unit. The tariff is usually levied by a national government when the imports cross its customs boundary. Protective tariffs attempt to shelter selected domestic industries by restricting the quantity and raising the price of competing imports, while revenue-producing tariffs are enacted mainly to increase government income. Some tariffs comprise fixed duties on a variety of imported products. However, in most cases, tariffs are ad valorem duties: that is, they are a percentage of the imported products' value.

Tariff-Jumping Hypothesis: A hypothesis proposed to explain foreign direct investments. Its proponents maintain that firms resort to foreign direct investments in order to jump over existing tariff or nontariff barriers in host countries.

Tariffication: This refers to a pledge by countries engaged in the use of nontariff barriers (NTBs) to replace these barriers with actual tariffs which could be reduced in future trade negotiations.

Terms of Trade: A nation's terms of trade is the relationship between the prices of its imports and those of its exports. Nations face declining terms of trade when import prices rise faster than export prices, while rising terms of trade occur when relative export prices grow faster.

Trade Barriers: Trade barriers are government restrictions on the free import or export of merchandise. They include tariff and nontariff barriers, which attempt to shelter selected domestic industries from international competition.

Trade Preference System: The practice of offering lower tariffs on imports from a specified country or group of countries. Accordingly, a trade preference constitutes a violation of the most favored nation (MFN) principle of non-discrimination among trading partners in the setting of tariff levels.

Transfer Prices: The practice of inflating the price of imports or decreasing the value of exports among the affiliated companies of a multinational corporation in order to enable a subsidiary to evade national taxation in a high-tax country.

Vertical Integration: A characteristic of some firms in some industries whereby the firms attempt to own and control activities which are both "upstream" and "downstream" from their core businesses. A good example is the petroleum industry, in which multinational petroleum firms tend to own oil production facilities, refineries, and retail outlets for refinery products -- the entire chain of activities from production to commercialization.

Voluntary Export Restraints (VERs): See Voluntary Restraint Agreements (VRAs) below.

Voluntary Restraint Agreements (VRAs): Bilateral, and sometimes secret, agreements stipulating that low-cost exporters "voluntarily" restrict exports to countries where their goods are threatening industry and employment, and thus forestall official protective action on the part of the importing country. They are usually used to get around the GATT restrictions on quantitative import restrictions. Because of their ostensible "voluntary" nature on the part of both the importer and the exporter, VRAs are considered consistent with the GATT norms of reciprocity. However, in actuality, VRAs result in the same outcome as that resulting from unilaterally imposed quantitative import restrictions. That is, the price of the goods subject to VRAs in the country of destination tend to rise because demand remains relatively constant while supply diminishes.

Welfare State: A nation in which the government undertakes large- scale action to ensure the provision of social goods and benefits. These welfare programs are usually provided at public expense with little or no cost to the recipient of the services. Policy prescriptions advanced by proponents of the welfare-state emphasize securing a minimum standard of living for all citizens where no one is denied an essential service which might be available to others; the production of social goods and services; the control of the business cycle; and the manipulation of total output to allow for social costs and revenues. Among the instruments of the modern welfare state are progressive taxes, social security, unemployment insurance, agricultural subsidies, and government-subsidized housing programs.

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This site was updated by Jeffrey Hart on August 30, 1999.
Please send comments to hartj@indiana.edu.