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.
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