INTRODUCTION TO INTERNATIONAL ECONOMICS

A course from Norman Sike Institute

This book will be used in support of diploma students, corporate training and teacher in-house training.

It is not about dry economic theory but explains a world of economics that resulted in imperialism, wars, blockades, protection policies, opium selling, independence struggles, foreign aid, donor and recipient oriented aid with exploitation.

There is inflation, hyper-inflation, depression, recession with aid in building roads for illegal logging, aid with strings and calls for trade not aid. Economics becomes alive.

Bruce Copeland BA BEdSt

Chapter 1  - Introducing the scope of economics

Economics is the study of business ranging from ordinary people to major international corporations. Economics covers the local informal market where fruit, vegetables and fish are sold and goes to the top of international trade in oil, iron and coal.

Trading in the markets can bring problems to the sellers when there is competition for market space, disagreement over prices and removal of produce. There can be women arguing and fighting. Men can argue with their wives over the money collected that the man wants to take.

There can be problems in the world market place with nations struggling over rights to raw material such as oil, coal, iron, LNG, timber, uranium and nickel.

Developed nations may have taken sites in developing nations and by transport provided control the collection and transport of raw material overseas.

The first man to write on this was the revolutionary Lenin who wrote in a Marxist-Leninist paper of the imperial nations setting up colonies to exploit the raw materials to use in the factories of Europe. His role as a communist ideologist has subsided and Lenin is now just a historian of the world.

To protect their new territory and raw materials, the nations set up administrations in the colonies. Soldiers and warships were deployed to drive away foreign powers that may seek to take over.

Wars were occasionally waged between colonial powers. In the late 1800s, the Boer War was fought between the British and Dutch in South Africa. British fought the French in Canada. British fought the Chinese in China in the 1840s and even introduced opium to slow the Chinese down.

The Japanese fought the British and Americans to open the Pacific War in 1942. There was the attack on Pearl Harbour and on the British destroyers off the coast of Malaya.

Why did this happen? The British and Americans had laid a blockade to Japanese ships seeking oil in the Middle East. This was the response to the Japanese invasion of Manchuria and China.

A key to Japanese economic policy today is their shortage of domestic oil supplies that forces the Japanese to regard oil as the key to their national security. There are massive reserves just like the oil reserves of the United States.

In 1973, the Japanese changed their policy on the Middle East War because of the setting up of the Organization of Petroleum Exporting Countries that threatened to lay a blockade on Japan in buying oil from Arab nations.

International trade was never the same for at least 40 years. Sanctions on other nations were to follow. The Egyptian armed forces was spared being pursued up the streets of Cairo by the Israelis. Hundreds of tanks were destroyed on either side.

So there are two levels of economic activity. There is the domestic level of products sold to the citizens that include fruit, vegetables, meat, fish, milk, sugar, salt, rice and processed drinks.

Then there is the international level of produce imported and exported. Most exports from Australia and Papua New Guinea come in the form of raw materials just as in the imperial times when nations were colonies. There is gold, coal, iron, nickel, oil meat and LNG.

In these days of global warming, much of the ores exported from Australia are going to the smelters of China and contribute massively to pollution and warming of the planet.

We pay lip service to alternative sources but the fact remains that Australia relies on exports to maintain the standard of living of the citizens. At least the LNG of Papua New Guinea is being proclaimed as a clean fuel. But there are many sources in the world competing for sales. This is a real buyers market.

Chapter 2  A balance of exports over imports

So the economy does not limit itself to people selling fruit in the markets and running businesses with goods and services for the citizens. There are fruit shops, restaurants, taxis, real estate agents, book shops all doing business with the citizens.

But the nation depends very much on the export of raw materials and services. This brings in massive income for the businesses which pass also to the Governments.

Papua New Guinea has to buy so much from overseas including trucks and cars, equipment of various kinds, medical services, computers, refined foodstuffs bought in supermarkets.  This means money going out of the country.

So there is money coming in and money going out. If we have a house and family, we know that it is better to have more money coming in than going out. It is the same with the economy of a nation. We have to have a positive balance of exports over imports – the balance of payments.

But how does the Government control this? The secret is to dampen the spending of the citizens. Can this be done? Has the massive tax on cigarettes stopped the smoking of the citizens? Or are they prepared to pay? One option is to buy a cigarette from a seller on the street. One cigarette is less expensive that a packet.

Another option is to increase the sales tax on imports. Papua New Guinea has been swamped by second hand cars from Japan. What if there is an increase in sales tax? Will sales drop?

The 8 point plan of the first Prime Minister Michael Somare stressed the importance of self reliance. We should have more exports than imports. But a country like PNG has import needs for consumption of the rising middle class.

Australia has a different population demographic. A high percentage of the population has been in employment and need cars for family and recreational use as well as houses.

There will be a need for a bank loan to buy a house. The spending power of the average family can be dampened if interest rates rise on home loans. That means that families have to budget more tightly and not spend so much on luxuries. Cut down on needs and wants. It is time to decide if the needs are really only wants.

My children need guitar lessons. I need to buy a carton of beer every Friday night. My family needs fruit and vegetables. My wife needs to buy new clothes every week. I need DVDs for the family.

A rise in interest will also dampen the rising inflation rate. The Reserve Bank is like the coachman on a carriage pulled by a team of horses. He can pull the reins to slow the horses and carriage down. He can let the reins go loose to allow the horses to gallop free.

When the inflation rate drops the Reserve Bank coachman can let the reins go loose by dropping the interest rate on loans. Suddenly the community like a team of horses, starts to run free.

In any decisions on interest rates, the coachman Governor of the Reserve Bank is guided by the decisions of the Central Bank in the United States. The reserve banks of the world control their horses in harmony.

Chapter 3 – inflation and hyper-inflation.

Experience in the past has shown that countries suffered with runaway inflation when there were no controls. There were three serious crashes in the world over the last 160 years – 1851, 1894 and 1930.

The crash in the 1850s was the reason for the gold rushes in Australia when people frantically went out searching for gold to support their families.

There was overspending and wild investment in economies that did not have the resource marketing backing. Wild horses ran free and the economy heated up. Companies crashed and the population was unemployed.

There have been very serious instances of hyper-inflation in the world during the nineteenth century. Germany suffered after World War 1 during the Weimar Government.

Devastation of war had destroyed the economy leaving the Government the option of printing money that was worth little or nothing. Inflation rose by thousands of percent. A newspaper would be sold for a wheel barrow of notes.

The same occurred in China during the 1930s after the Great Depression of 1931. The Kuomintang Government was unable to control the currency having printed large amounts of worthless paper. It gave a huge advantage to the Communists led by Mao Tse tung.

Countries like Indonesia after independence and Argentina also suffered hyper-inflation. There is needed large amounts of money from friendly Governments and world banks to dampen the runaway inflation with large amounts of rescue funds and help to raise the economy and employment.

Chapter 5.  Prices on the World Market

Let us read the Business page of the local media. We check commodities of light crude oil, natural gas, gold, copper, sugar, coffee and cocoa. These will be important prices to be followed by sellers and consumers on the world market

These prices are not determined in Papua New Guinea but by commodity brokers across the world. They will want to make sure that commodities are bought as cheaply as possible and sold as dear as possible.

At the present time, the world is being worried about the continued drop in the price of oil. This is causing problems to the Middle East nations as the ghost of world recession continues. Industry is slowing down across the world which means a drop in the need for oil and LNG. This will affect Papua New Guinea.

If the industrial growth of China slows down more, there will be a drop in Australian orders for coal, iron and oil. Some people say this is good given the world global warming. But it will mean a drop in Australian employment.

The greatest threat to the world of oil came with the Israeli-Arab war in 1973. There was fierce fighting to the point that Israel invaded and occupied the land to the west of the Jordan River. They have never given the land back to Jordan and continue to build settlements.

The land of the Golan Heights was taken. This was where the Syrians used to place artillery to shell Israeli settlements. Israeli settlements or Kibbutzes had deep shelters to which the people ran from the fields when the siren sounded. Children slept in the shelters at night.

The Israelis destroyed the Egyptian army and were ready to drive the army up the streets of Cairo. But it all ceased  when the Arab oil countries stopped the supply of oil to all nations supporting Israel.

The first nation to break was Japan that told the Israelis to withdraw back over the Suez canal. Other nations followed. A new era of oil marketing had begun.

This is resources diplomacy in its extreme form. Routine diplomacy in marketing occurs between nations. One agrees to buy consignments of wheat if the other agrees to buy vehicles. One will buy a neighbour’s oranges if the neighbour buys mutton.

The Arab nations set up the Organization of Arab Petroleum Exporting Countries (OAPEC) and decided the new price of oil. This was an exercise in international price fixing.

Suddenly costs for us all went up over the world. OAPEC nations became rich as massive incomes came from the industrial world.

Many Arab countries did not have the means to absorb their new capital. So many invested in the industrial world. Arab sheiks bought airlines, shipping lines and hotels over the world.

The OAPEC then became OPEC and added Nigeria and Venezuela. These countries are now being pressured by the Moslem extremists.

Chapter 6  Resources Diplomacy over the world market

Developing countries have difficulty in selling their raw materials if the client nations across the world have got together and set the buying prices. It may happen one day with LNG as we find that a number of nations are producing LNG.

Another strategy for the buying nations is to make sure that they do not depend on only one producer who can put pressure on for higher prices. So buyers make sure they have several sources of a particular raw material.

If one producer makes a demand for higher prices, the buyers can stop the contract. If the sellers decide to weaken and go back to the buyer, they may find that the price will have dropped at the hands of the buyer. They have been punished.

Criticism has been made of many developed nations that work to keep the developing countries poor with protection policies by which certain products are blocked and prices for commodities are kept low.

The developed nations have a great advantage in the high technology products they sell to nations overseas. Military hardware has to be bought from neighbours that can be trusted to be friendly.

There is no value in buying war supplies that are also being bought by the enemy. There can be no bargaining on the world market for military supplies.

The world is being divided into ideological zones. Moslem countries will have strong resources diplomacy against Israel. The Arab oil producing nations are fortunate in having a commodity needed by all major capitalist industrial powers.

Chapter 7 Capital and interest payments

We all hope to have savings that we may put in the bank or invest. We may even buy Government bonds. If we leave the investment for some time, our capital accrues interest. We will not make a profit if the inflation rate is rising and swallows up the interest and some or all of the capital.

When we borrow money, there is interest to be paid. If unable to repay the loan we may lose the assets that we have posted as collateral. The car or house may be repossessed by the lending organization.

This may end up as a loss as the lender may only be willing to sell the repossessed stock for the amount owed. It is unfortunate if a K10,000 car is sold for K1200 to cover the debt.

But nations also borrow money with interest. The nation cannot be repossessed by the lending authority. It is a sovereign nation with international rights. Default on borrowed money has to be treated with care. The nation may need time to pay.

There may be a call by the borrowing nation to have the debt cancelled with some added benefit to the lending authority. Every nation has resources that can be developed. New agreements may be made that benefit the lending authority.

There are some enormous debts in the world. Russia still owes massive debts to the United States for military hardware bought during World War 2. The USA has never seen fit to delete the debts for Cold War reasons. The USSR has not seen fit to repay or repudiate the debt.

Every nation has debts, some mounting into the trillions of kina among the larger powers. Every nation operates on a deficit budget which means that money has to be obtained from somewhere else.

National Governments have resources hidden away in the form of Government bonds. Some have gold reserves. They know they have resources under the ground that are as good as money in the bank.

In recent years, Greece has suffered from deep recession that has come from huge deficits in capital and massive interest payments. The Government has been unable to give necessary services to the people.

National pensions have dropped to low levels reducing all pensioners to poverty. The Greek Government has pleaded with the European Union to help with rescue loans and grants.

The problem in Greece is that this is a country that has been long on ancient culture and short on economic development.

The countries in the Mediterranean thrived under the Roman Empire but did not develop a strong industrial base as occurred in the northern industrial zones of Germany and Britain. Such countries have an agricultural base.

It is an interesting side comment to make that certain industrial nations in northern Europe became protestant in the centuries past as the peasant culture was dominated by a middle class culture able to read the Bible being newly printed.

The agricultural nations in the south remained Catholic including southern France and southern Germany. The Catholic influenced remained while the feudal system continued.

Portugal and Spain grew in trading not an industrial culture. These countries did not have strong mineral resources to provide national income. Ireland was an agricultural country with an industrial base. The ill-fated ocean liner Titanic was built across the Irish Sea.

The United States suffers from economic difficulties not experienced in the decades before. There are many reasons. The national debt has increased. The United States is no longer a country where dreams come true on a routine basis.

The car industry has suffered badly. There is much investment from Japanese car builders to the point that much of the car industry is Japan based. Profits go back to Japan. Much of the vehicle spare parts are being contracted out to Japanese and South Korean vehicle companies.

The centre of the car industry was Detroit where fortunes were made. Thousands of residents were employed in the car factories in the town. Money flowed freely but no longer.

Population has moved out as car companies closed. House prices have dropped. Much of the retail industry has closed. Sadly the companies are unable to maintain the pension schemes of retired workers.

The economy can fall like pins in ten pin bowling. All sectors of the economy and community will be hit. Inflation hits us all in higher prices for goods and services.

Farmers cannot be helped. There can be limited disaster relief. Schools will not be subsidized. Children are not helped with fee subsidies. Hospitals will lack basic medicines and equipment. Road maintenance will be reduced. Bridges washed away will not be replaced.

Chapter 8  The world in the same economic boat

We see the economic structure of the world when we examine the financial pages of the local newspaper. The currency in the market page focuses on only limited numbers of nations that are either key economic units or located in our Pacific zone.

We read of the currency fluctuations in Australia, United States, Great Britain, Japan and Singapore. These are key indicators in terms of the International Monetary Fund. We do not see any currency news on the Communist nations of China, Russia or the Moslem nations.

If the currency fluctuates in the key economies, there will be a ripple effect. Australian bonds will drop if the US bonds drop. If the US currency rises, the Australian currency will rise.

But then if China signs a contract for huge amounts of Australian coal, then the Australian dollar will rise, to hell with global warming.  If the dollar rises against the PNG kina, the exchange will favour money coming into the country.

If the PNG kina rises against the Australian dollar, the Australian contract workers in PNG will send less money back to Australia. If the kina drops, the PNG exporters will benefit as our commodities will be cheaper on the world market.

Chapter 9  Levels of national development

There was a scale devised in the 1970s to grade the nations of the world. The nations were graded on a scale 1-6. Even since that time, nations are changing in economic strength.

The US is dropping. South Korea is rising. Japan is verging on recession. China is rising but with massive economic problems from a rising population and pollution from industry.

It is difficult to grade nations today with the problems that exist. In the 1970s, the USA led the world but since that time China and South Korea have lifted. Japan was once a leading economic power but is facing recession.

So we define level 6 nations as having strong primary, secondary and tertiary industries, a strong labour force to support these industries, ready supplies of raw materials domestic and overseas, ready markets and overseas investment and a strong military force.

Would that now be USA, China and Japan? There is still the capacity to rise. Perhaps these nations have dropped to level 5.

The level 4-5 countries have a strong industrial base but not of the same political strength as the major nations. These include Australia, Taiwan, India, Britain, Germany, South Korea and Saudi Arabia. We read in the media a report that the education standards of South Korea are among the highest in the world.

The smaller nations would be level 3 and include African and South African nations, Norway, Sweden, Vietnam and some of the lesser oil producing nations, some wracked by war.

The levels 1-2 nations would be Papua New Guinea, Solomon Islands, Vanuatu, Philippines. These are countries without a strong industrial base and dependence on sale of raw materials.

The constituents of national power include the successful exploitation of land, labour, population, capital, resources, industries, technology, ideology, defence and alliances.

Japan has weakness in having to rely on 100% import of oil. China has weakness in the enormous population pressure that has to be supported.

Several Arab oil exporting nations have the weakness in a lack of infrastructure in which to absorb capital, necessitating investment overseas. Middle East nations have the deep problem of ongoing warfare, terror against the population and refugees.

Chapter 10  Donor and recipient oriented aid.

The major Western nations are in the same economic boat. The nations in the International Monetary Fund are in one boat. Others are floating separately.

We are all affected by the movements of currency of the world and by economic activity in general. Daily we read of the movement of currency, stocks and bonds in the business pages of the newspapers.

In the past, the world has suffered world depression because all countries were acting separately and letting their currency run freely. Their economies over-heated. Today the Reserve Banks of the Western nations work to control inflation largely by raising and lowering interest rates.

The world has suffered recession even in recent decades. But we will avoid a world crash of the magnitude of the 1930s, 1890s and 1850s.

Nations seek to dominate the economic activity by resources diplomacy. They link their overseas buying to the diplomacy between nations.

There is constant criticism that the major powers will not help the developing nations to become economically strong by building a foreign market.

There are two kinds of aid. There is donor–oriented and recipient oriented aid.

Aid is intended to help a nation to grow. But aid can also be intended to pressure a nation into an economic imprisonment.

Paul Baran once wrote that the focus of aid support to developing nations should be on developing their rural economy. This is recipient oriented aid.

Roads, bridges, wharves and airstrips are to help the rural sector in links to the urban areas. Farmers are helped to transport primary produce to urban markets.

New farming methods should be promoted among farmers with funding for fertilizers and pesticides for insects and plant viruses.

Most important of all is that the produce of the farmers be allowed for export to the donor nation. That is where it ends. The donor nation puts up the barriers. PNG has the capacity for a strong citrus industry in the highlands. But Australia would block any chance of citrus exports. 

Donor oriented aid is intended to be given for the benefit of the donor. Roads, bridges and wharves help the farmers but also the capacity of the illegal loggers to remove timber.

Aid can be given to lock a nation into a defence alliance. Soldiers can be trained in the country of the donor. Military hardware can be given to link the military into the donor military supply system.

So we have to see aid in realistic terms. All aid is basically donor oriented. But it is the degree of support that the aid can give to improving life in the recipient nation.


Chapter 11 – Export of arms

One of the major industries of the world is the production of armaments which is described as a multi-billion dollar trade that involves all nations as clients.

A recent report in The National 17 March 2015 states that the major arms exporters are the United States with 31% of global exports followed by Russia with 27 % of sales.

Far behind these are China, Germany and France. The major Asian clients are Pakistan, Bangladesh and Myanmar. China had 18 client nations in Africa.

Russia’s top client was India while South Korea was the main client of the United States. The stand-off between North and South Korea is good armaments business for the United States.

All this puts a new light on world politics with our knowledge that world conflicts have a political, ideological and economic base. Conflicts are testing grounds where arms are trialed against the arms of other countries. Battles won are good business for arms manufacturers.

Years ago, there was a war in the Falkland Islands between Britain and Argentina. It was a war of missiles against warships.

We recall the British destroyer the Sheffield hit by an Exocet missile that obliterated the internal workings of the ship while the Argentinian warship Admiral Belgrano sank with great loss of life. Men died on both sides in the name of testing weapons.

There was a cartoon in the newspaper of a war of ships conducted in a large test tube. Both sides and the arms manufacturers were carefully watching the destructive power of the weapons of the other side.

So armaments selling nations are making massive profits from the nations of the world that spend a significant percentage of their Gross National Product on armaments. Poverty exists while nations prepare to defend themselves against their neighbours.

Massive arms sales are not the sign of economic power of client nations. The cost in armaments would be a factor in perpetuating poverty in the wider mass of population.

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