Why Some Developed Economies Also Rely on Foreign

Foreign reliance is a worldwide system of power in which poorer nations are Developed Economies on powerful countries, allowing stronger countries to exert significant control over the economic and political behavior of weaker countries. Foreign dependency usually leads to underdevelopment in the dependant country; policies geared to the interests of a better nation might stifle local progress, hasten environmental devastation, or encourage short-term growth at the expense of long-term growth and self-sufficiency.

Dependency On Other Countries

Overseas dependence is seen by some scholars as a continuation of colonial economic relations. Less-developed countries are frequently overseas territories whose economies were centered on the production of raw resources for their colonial masters’ manufacturing industries. Few former colonies possessed new manufacturing industries or trained workforces to compete in the international market when they gained independence, so they remained to export inexpensive raw resources to European colonial powers. The industrialized nations then profitably resold manufactured commodities to their erstwhile colonies.

Dependence on foreign help can also have a big impact on the recipient country’s economy and politics. Even though foreign aid can have favorable political and economic effects in developing countries, such as continuing to increase political involvement and local public spending on social programs, donor countries frequently use pledges of aid (or threats of aid cessation) to pressure recipients to adopt the donor’s preferred political or economic policies.

The latter issue is especially essential in terms of loan acceptance. If a country wants to borrow money from the World Bank, it must agree to change its economic system, liberalize its economy, and improve its worldwide financial accountability. Furthermore, repaying loan debt frequently causes balance-of-payments problems for the receiver, maintaining and deepening the recipient’s economic dependency.

The reliance of developing countries on foreign money can also prolong dependency. A large portion of a developing country’s financial capital comes from beyond its borders. Foreign aid or foreign direct investment (FDI) can be used to fund activities such as hosting foreign enterprises that create jobs, improve local capital flows, and generate tax revenue.

FDI, on the other hand, has the potential to cause problems. Foreign enterprises from industrialized countries generally dominate the domestic market, hindering or inhibiting local industry development. Furthermore, the host country’s administration may be required to grant tax benefits to maintain the foreign market in the world. To encourage foreign enterprises to establish or continue operations in the host country, the host government may loosen labor or environmental rules.

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The Exchange of Goods and Services Between Industrialized and Developing Economies

Trade between rich and underdeveloped countries frequently causes difficult issues. Most developing countries economies are founded on agriculture, and many of them are tropical, thus they rely largely on the profits from the export of one or two products, such as coffee, cacao, or sugar. Markets for such items can compete effectively (in the sense that economists define the term)—price changes are highly sensitive to changes in demand or supply.

In contrast, the prices of consumer products, which are the most common exports of wealthy countries, are usually far more constant. As a result, as the price of its export product fluctuates, the tropical country’s “terms of trade,” or the ratio of international prices to import prices, fluctuate dramatically, frequently wreaking havoc on the domestic economy. Efforts at price stabilization and output management have been tried for practically all significant primary commodities. Various degrees of success have been achieved in these undertakings.

Trade between industrialized and developing countries has long been a source of contention. As multinational businesses from wealthy countries relocate the business to countries with a lower labor pool and relatively less economic or political clout, critics point to the exploitation of foreign labor and the environment, as well as the abandoning of native labor demands. The WTO’s functioning came under increased scrutiny from detractors when trade talks were interrupted by globalization protestors during the WTO ministerial session in Seattle in 1999.

These critics expressed a variety of concerns about the WTO’s power and scope, with the most serious concerns centered on impact on the environment, health and safety, domestic worker rights, the WTO’s democratic nature, self-determination, and the long-term knowledge of actively supporting commercialization and free trade over other values.

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The Trade Deficit and Imports

A trade deficit occurs when a country consumes as much as it exports. A trade surplus is created when it consumes less than it exports. When a nation has a trade imbalance, this should borrow money from other nations to cover the additional imports1. It’s the same as if you were starting a new family. To buy a car, a house, and furniture, the couple will have to borrow money. Their earnings are insufficient to afford the costs of raising their level of living.

A country, like the new couple, should not keep borrowing to cover its trade deficit. A developed economy should eventually become a major exporter. In that case, a current account surplus is preferable to a deficit.

Why? To begin with, exports increase economic activity as measured by GDP2. They improve earnings while creating jobs. Second, imports make the country reliant on the political and economic might of other countries. This is especially true if the country imports goods like food, oil, and industrial materials. It’s risky if it depends on a foreign entity to feed its people and keep its manufacturing running. When OPEC imposed an oil export ban on the United States, for example, the country went into recession3.

Third, countries with large levels of imports must boost their foreign reserves. That is how the imports are paid for. This can have an impact on the value of the domestic currency, inflation, and rate of interest.

Fourth, domestic enterprises should be allowed to compete with international businesses importing equivalent goods and services. During March 2019 and March 2020, small enterprises added 466,607 net new jobs. Small firms employ 32.5 million people in the United States, accounting for 46.8% of the private employment4. Finally, exports assist domestic businesses in gaining a competitive edge. They learn to generate a variety of internationally wanted goods and services by exporting.

  1. Federal Reserve Bank of San Francisco. “Is the U.S. Trade Deficit a Problem? What Is the Link Between the Trade Deficit and Exchange Rates?” Accessed Feb. 5, 2020, https://www.frbsf.org/education/publications/doctor-econ/2007/june/trade-deficit-exchange-rate/
  2. Office of the United States Trade Representative. “Economy & Trade.” Accessed Feb. 5, 2020. https://ustr.gov/issue-areas/economy-trade
  3. Office of the Historian. “Oil Embargo, 1973–1974.” Accessed Feb. 5, 2020. https://history.state.gov/milestones/1969-1976/oil-embargo
  4. Small Business Administration. Office of Advocacy. “2021 Small Business Profile,” Pages 1,2,4. https://cdn.advocacy.sba.gov/wp-content/uploads/2021/08/30144808/2021-Small-Business-Profiles-For-The-States.pdf
  5. USEW (2022). Step By Step Essay Writing Guideline for Beginners. https://www.usessaywriter.com/step-by-step-essay-writing-guideline-for-beginners/

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