The last three chapters have concerned international economics, a discipline that deals with two distinct human activities: the exchange of goods and services (international trade) and the exchange of money (international finance). The material was separated into three chapters to facilitate explanation of international economic relations. In real life, of course, the world economy operates as an interrelated and interdependent network of trade and financial activities. The purpose of this Emerging Issue is to put it all together by focusing on the relationship between the world of goods and the world of finance.
International finance evolved as the facilitator, or "lubricant," of trade activities. This role implies a superior/subordinate relationship-one in which financial transactions follow and are subordinate to goods transactions. This was indeed the case until very recently. The exchange of goods was at the center of discussions among the countries of the world, and financial matters were introduced into the agenda only when they seemed to be hindering international trade.
One of the greatest fallacies of contemporary thought on international finance is that financial transactions continue to be subordinate to trade in physical goods. In recent years the international financial system has developed a "mind of its own," and it now operates on a scale and by means of a technology beyond the comprehension of most world leaders, both private and public. As Table 8.2 shows, the volume of transactions in the symbolic economy is 37 times the volume of transactions in the real economy. This international financial system, far from serving simply as a trade facilitator, actually runs or dictates trade transactions. The fact that "the tail now wags the dog" has not yet sunk into the minds of most of the world's leaders. As a result, considerable time, effort, and money are being spent in tackling the wrong end of the relationship.
According to Peter Drucker, three fundamental changes have occurred during the last decade or so:
- The primary-product economy has come "uncoupled" from the industrial economy.
- Within the industrial economy, production has come uncoupled from employment.
- Capital movements, rather than trade in goods and services, have become the driving force of the world economy. The two have not quite become uncoupled, but the link has become loose and, worse, unpredictable. 1
| The Real Economy | The Symbolic Economy |
|---|---|
|
Exports and imports of goods and services $5 trillion a year |
Capital movements, exchange rates, and credit flows
|
| SOURCE: Peter Drucker, "The Changed World Economy, " Foreign Affairs , Spring 1 986, 768-79 1 . | |
The growth of external indebtedness has only exacerbated the first two problems Drucker lists. Because of the extent of their indebtedness, some countries have been obliged to change their internal fiscal, monetary, and developmental policies and plans to accommodate the servicing of their debt. As a result, developmental plans that would have resulted in an increase in employment and an improvement in the general welfare of the citizens have given way to "export cash crop" plans. To compete in an ever-changing world, countries have adopted production techniques that are contrary to their "comparative advantage." Thus, for example, countries with abundant labor have invested heavily in machinery (capital-intensive processes), the purchase of which requires massive borrowing of funds from abroad, thereby worsening an already critical indebtedness problem.
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