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Economics Navarra Essay!

Nout, Luis, Johannes and Leon

Economic aid in post war periods such as the Marshall Plan have been successful in ensuring peace and is a useful model for solving current world conflicts. Nout, Luis, Johannes and Leon IB Economics HL Mr. Glover Munich International School


Economics Navarra Essay!

Nout, Luis, Johannes and Leon

The original Marshall Plan was established June 5th, 1947 with the goal to modernize European industrial and business works with the usage of high-efficiency American models. One of the goals was to reduce or entirely remove trading barriers such as the impositions of tariffs. This would provide a further incentive to trade and thus boost economies around Europe and create trading partners instead of enemies. By joining together the states of the European continent the United States hoped to establish sustainability with the usage of the Marshall Plan. Many argue that the model indeed worked, statistics show that output was 35% higher in 1951 compared to post-war 1938. Continentally it set up institutions to join the economies of Europe and can be argued as a trigger for the establishment of the European Union. Implementation of a similar model could lead to positive outcomes in conflict regions such as the middle east. Three key concepts must be kept in mind when implementing the model in a region such as the middle east. The best approach of implementation would consider education, negotiations and financing. By education one can enlighten the nations of the possible positive outcomes in agreeing with the plan. Negotiations would trigger friendship as opposed to conflict and start the process of joining nations economically. Finally financing would be needed to fuel the plan and bring it into practice. A financing option could include special drawing rights with the IMF1 , considering the implications of each individually. One of example of implementation is with Iraq and possibly Iran. The Iraqi case has been very controversial in the last 20 years. Iraq has been a member of the Organization of the Petroleum Exporting Countries (OPEC) for a long time and resulting from the Iraqi invasion of Kuwait the United Nations took actions against Iraq. They banned Iraq to export anything but oil in the period between 1990 and 2003 as a punishment for the Iraq-Kuwait war. Iraq was still allowed to import commodities for citizen needs such as food, medicine and infrastructure reparation material, but overall trade was largely restricted. Iraqi’s major exports have always been crude oil, averaging around 84% of its exports2 . With food exports of around 5% and given its geographic status Iraqi imports focus largely on food and medicine. Joining the Gulf Cooperation Council (GCC) could be one method to allow Iraq to increase its food and medicine stock to trigger economic growth and stability within its nation. The Gulf Cooperation Council (GCC) is an active trading bloc in the middle east from which Iraq was kicked out after the invasion of Kuwait. Due to the conflict in Kuwait, Iraq now has to pay a tariff to import from any of the members of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). The extra cost of the tariff slows potential economic growth. A tariff is a tax placed on imports in order to increase government revenue and provide protectionism on trade. With the usage of the Marshall Plan model one could assist Iraq in further development and stimulate it to rejoin the GCC. This would remove the trading barriers on imports from the perviously named states and thus further boost economic growth as well as become strong trading partners with the gulf states as opposed to continued conflict. Examples are Oman and the United Arab Emirates who have large fish resources, an example of the food needed in Iraq. Further the United Arab Emirates, as well as other GCC states, engage in oil 1

Source: www.globalmarshallplan.org

2

Source: http://www.economywatch.com/world_economy/iraq/export-import.html


Economics Navarra Essay!

Nout, Luis, Johannes and Leon

refinery and can therefore take advantage from the removed tariff in importing crude oil from Iraq which they can then refine themselves. The diagram below shows the comparative advantages in commodities within Iraq3. 200 150 100 50 0 -50 -100 Minerals

Fresh Food

Chemicals

Processed Food

It is thus shown that Iraq has an extremely large comparative advantage in minerals such as crude oil. On the other hand it has a low comparative advantage in processed food and could therefore gain through international trade by importing processed food and export minerals such as crude oil. One method of achieving this is by joining the GCC.

3

Source: http://www.intracen.org/countries/toolpd99/irq_3.pdf


Economics Navarra Essay!

Nout, Luis, Johannes and Leon

Diagram A

Diagram A clearly shows the advantage for Iraq in rejoining the GCC. Previously the price of food imports lie at P (Iraq) + Tariff. By joining the GCC trading bloc the tariff is removed and import price drops to P (Iraq) thus giving obvious advantages to customers within Iraq (more can be imported for the same budget). Further more, export performance improves within Iraq for any goods in which it has a comparative advantage. Minerals are one of the main goods in which Iraq has a comparative advantage4 and it is a resource that GCC member states consume. A country has a comparative advantage in a product when it has a lower opportunity cost in producing it in comparison to another country. This is because with the removal of the tariff other member states of the GCC will have an incentive to import any goods from Iraq with which it has a comparative advantage. This would increase Iraqi production from Q2-Q3 to Q1-Q4 increasing the revenue of Iraqi corporations. Demand increases from Q3 to Q4 as a result of the price drop with a advantage for customers. This advantage is represented by the area shaded in blue. The area shaded in yellow represents the regained efficiency as production increases in countries which has a comparative advantage in a certain product. Overall by providing the GCC member states with a new trading partner, the advantages for Iraqi exporters and the additional financial assistance provide by implementing the Marshall Plan model result in a very positive effect on Iraq.

4

Source: http://www.intracen.org/countries/toolpd99/irq_3.pdf


Economics Navarra Essay!

Nout, Luis, Johannes and Leon

Due to the availability of cheap labour in foreign nations, such as Iraq, after they open up their markets to the world, multinational corporations (MNCs) will have a tendency to invest in these nations. An example is the construction of their factories in these countries with a cheap labour level. As a result there is an effect on the unemployment in the wealthy countries where the MNCs used to invest and build their factories. An example was with the introduction of the north american free trade agreement (NAFTA) which caused an increase in unemployment in the short run within the United States as jobs moved to Canada and Mexico where the MNCs started to invest and build factories. Due to this, the wealthy countries might have a reluctance in the implementation of a model similar to the Marshall Plan due to the possible effect of its own unemployment. Unemployment could worsen in the short-run however due to trade creation it will increase in the long run. There is thus a net gain in jobs within the United States through trade creation in the long run. For Iraq this could the marshall plan model could open its markets to the world, trigger foreign direct investment and thus increase employment. In further evaluation, one must however consider economic aid to nations such as Iran, given the very similar geographic position as Iraq. Economic aid to Iran can be a very controversial topic, and could be more problematic as the Iraqi case. Although theoretically trade creation could be triggered, moral and politic aspects must be considered. In 2005 the United Nations Security Council imposed economic sanctions agains Iran as a result of its initiation in nuclear energy. They were fears than Iran could use technology within their civil nuclear energy program to produce weapons of mass destruction. With the recent war on terror, especially the United States, would be extremely reluctant in assisting Iran in a similar manner to Iraq due to the fact that they may use the aid to their advantage. The case with nuclear energy can also be present in Iraq. An example is the easier access to uranium through the removal or various trade barriers and UN sanctions. Finally it is important to note that countries such as Iraq and Iran have large amounts of money however do not use it effectively in the construction of their nation. This must be noted in the implementation of a marshall plan modeled aid program leading the aid to shift from economic to the integration of Iraq and/or Iran with global market systems and trade markets. Moral and political issues aside, there remains the issue arising from the joining of Iraq with the Gulf Cooperation Council (GCC) being that that it shares very similar commodities. The major exports of each GCC member states is crude oil, a mineral in which Iraq already has a large comparative advantage in. The advantages of trade creation explained before are emitted and indeed possible were Iraq to join with a customs union or trading bloc. However due to the similarity of products, the GCC does not seem to be the most effective solution. Rather, the model of the Marshall Plan can be used effectively on Iraq by integrating it within the global trading market. By cooperating with organizations such as the World Trading Organization (WTO) Iraq can benefit from trade creation, mainly in the area of its largest comparative advantage: minerals and thus crude oil. In conclusion, the usage of the Marshall Plan model in post-war periods, such as the case within Iraq, can be used very effectively given the proper implementation. This would disregard economic monetary aid however focus on the integration of Iraq and the global market opening up resources to them. Economic aid in the form of the Marshall Plan has indeed been successful in ensuring peace and it is definitely a model that can be used to solve current world conflicts, such as the case in Iraq, by focusing on global, rather than regional, economic integration.


Economics Navarra Essay!

Bibliography 1) www.globalmarshallplan.org 2) http://www.fas.org/sgp/crs/mideast/RL32260.pdf 3) http://www.gcc-sg.org/eng/index.php

Nout, Luis, Johannes and Leon


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