Key Concepts in International Economics: IEO, BOP, and Development
International Economic Order (IEO)
The International Economic Order (IEO) is the set of rules governing international economic relations designed to achieve specific global objectives. These objectives include:
- Economic stabilization
- Economic liberalization
- Economic growth
- Solving global economic problems
International Trade and the Balance of Payments (BOP)
Components of the Balance of Payments
The BOP is a statistical statement that summarizes transactions between residents and non-residents during a specific period. It is divided into several main accounts:
1. Current Account Balance
This account records transactions in goods, services, primary income, and secondary income (transfers). It is composed of the following sub-balances:
- Trade Balance: Payments and receipts resulting from the imports and exports of tangible goods.
- Balance of Services: Receipts and payments arising from the sale of services, such as transport, tourism, communications, and royalties.
- Balance of Primary Income: Income and interest payments, dividends, or profits related to factors of production (labor and capital).
- Balance of Secondary Income (Transfers): Money movements without consideration (unrequited transfers), which can be public or private.
2. Capital Account
Records capital transfers, typically used to finance capital goods.
3. Financial Account
Records the change in assets and liabilities, including:
- Direct Investment
- Portfolio Investment
- Other Investments
- Derivative Financial Instruments
- Central Bank’s Financial Account (Official Reserves)
4. Errors and Omissions
This is the statistical discrepancy adjustment necessary to ensure that all other accounts in the Balance of Payments sum correctly.
Economic Integration: Definition and Stages
Economic integration describes the various processes through which national economies become interconnected. As integration increases, barriers to trade and movement between markets progressively decline. The goal of integration is to eliminate, progressively, the economic borders between participating countries. This process involves negative measures, such as removing existing barriers that divide economies.
Stages of Economic Integration
Free Trade Area (FTA)
An FTA comprises two or more countries that immediately or gradually abolish customs and trade barriers among themselves, allowing the free movement of goods and services. Crucially, each member retains its own external tariff schedule and independent trade policy toward third parties.
Customs Union
The establishment of a Customs Union involves the immediate or gradual abolition of customs barriers and restrictions on the flow of goods and services between member countries, plus the adoption of a Common External Tariff (CET) and a unified trade policy toward non-members.
Common Market
A Common Market implies the existence of a Customs Union alongside the free movement of factors of production (labor and capital) among member states.
Economic Union
This stage assumes the existence of a Common Market and requires members to establish common macroeconomic and microeconomic policies, including unified monetary, fiscal, and credit policies.
Political Union
This final stage involves deep political coordination, often achieved by creating a joint governing body to which member states cede a degree of sovereignty.
Understanding Underdevelopment and Global Inequality
A fundamental question regarding the current global economic system is whether it promotes convergence or divergence between countries. To analyze this, we must consider key indicators and concepts, primarily GNP per capita, absolute poverty, and relative poverty.
- Absolute Poverty: Defined as the minimum subsistence level below which a person is considered poor.
- Relative Poverty: Defined by comparison against the average standard of living of the majority of society.
Underdevelopment is often characterized as a vicious circle where a lack of resources is compounded by the inability to obtain them. This cycle can be analyzed through three interconnected vectors:
The Three Vectors of Underdevelopment
1. Economic Vector
This vector is characterized by a shortage of financial capital and a partial or total lack of technological resources. The insufficiency of financial resources prevents productive investment, hindering economic growth and wealth generation. The resulting lack of profits makes it extremely difficult to achieve adequate capital accumulation necessary to restart and sustain the production process.
2. Social Vector
The social vector is reflected in three important aspects:
- Emigration: Represents a significant cost in terms of human capital loss for the developing nation.
- Educational Gaps: Deficiencies in educational attainment due to inadequate socio-economic structures.
- Social Stagnation: A tendency toward conformity or acceptance of the status quo, hindering innovation and progress.
3. Political Vector
Underdeveloped economies are typically characterized by strong social and political instability. They commonly operate under military authoritarian regimes or weak democratic systems, often under pressure from powerful interest groups or incumbent governments. In contrast, more stable and transparent democracies often exist in more developed countries.