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INDIVIDUAL ASSIGNMENT Student ID Number 2621048 1 Introduction Global companies are growing in number, as is their impact on developing countries In recent decades, global firms have been increasingly[.]
INDIVIDUAL ASSIGNMENT Student ID Number: 2621048 Introduction Global companies are growing in number, as is their impact on developing countries In recent decades, global firms have been increasingly attracted to developing countries for purchasing raw materials, out-sourcing production and selling in foreign markets A globalizing economy, technological capabilities, and financial incentives such as tax breaks by local governments have fueled this transition The rising presence of these companies in the developing world has had a considerable impact on the host country and beyond, both beneficial and harmful For example, developing countries’ share of global foreign direct investment (FDI) rose to 70% in 2022, a record (UNCTAD, 2023) However, there is evidence that some global companies operate in host countries with much lower environmental and social standards than their home countries This report evaluates and discusses the agreement between Mark X - a global clothing company, and Roseau - a developing country that manufactures for Mark X, including negative and positive aspects Impact of currency depreciation on macroeconomic objectives Those responsible for the conduct of a nation's macroeconomic policy generally have four objectives: a favourable trade balance, a high level of real GDP per capita, a low rate of inflation and a low rate of unemployment (C.A Knox Lovell, 1995) (Milica Delic, 2005) (Nayyar, 2011) 2.1 Improvement in trade balance According to the Marshall-Lerner condition, if the total price elasticities of demand for exports and imports is greater than unity, the depreciation of a country's currency will result in an improvement in the trade balance To the findings of (Kurtovic, 2017), real effective exchange rate depreciation benefits the trade balance of a developing country in both the long and short run In general, the depreciation of Roseau's local currency (R$) makes imports more expensive and exports cheaper Therefore, imports are reduced, and exports are increased, contributing to eliminating the balance of payments deficit Mark X, who pays subcontractors in Roseau in US dollars, can reduce manufacturing costs in US dollars, making clothing prices more competitive when sold in the US and foreign markets Because clothing goods have a high price elasticity of demand, Mark X can increase the sales number, leading to an increase in exports By that, the balance of payments of Roseau enhances economic growth, becoming a more attractive prospect for further investment and contributing to the growing role of developing countries, such as Roseau, in world trade 2.2 Gross domestic product (GDP) For developing countries, real currency depreciation raises significant annual real GDP growth (Maurizio Michael Habib, 2016) It should also be noted that utilizing the exchange rate as a policy lever may be advantageous only in the early phases of economic development, becoming unimportant as Roseau gets wealthy in the long run Specifically, a depreciation in the local currency of Roseau (R$) exchange rate leads to higher exports and lower imports, increasing aggregate demand AD (assuming demand is relatively elastic) In normal circumstances, higher AD will likely cause higher real GDP and inflation for Roseau 2.3 Rate of inflation Exchange rate depreciation can bring about an increase in the inflation rate (B Imimole, 2011) In Roseau, there are three main pushes for an increase in inflation Firstly, a depreciation in the local currency of the (R$) exchange rate makes imports more expensive, causing cost-push inflation Secondly, AD is increasing, causing demand-pull inflation Finally, with cheaper exports, manufacturers like Mark X may have less incentive to cut costs and become more efficient; therefore, over time, costs may increase To sum up, with a depreciation in the local currency of Roseau (R$) exchange rate, it is a challenge for the government of Roseau to control the high inflation rate 2.4 Rate of unemployment In economic models, exchange rates can have an impact on enterprises and their labor demand (Vieira, 2016) Obviously, when the local currency of Roseau falls in value, imports become more expensive, causing local customers to buy more local items Exports become more competitive worldwide as they become less expensive, increasing demand for items manufactured in Roseau As a result, local businesses and global companies manufacturing in Roseau, such as Mark X, aim to increase production by hiring additional people Therefore, the rate of unemployment could decrease U.S imports capital from foreign countries The U.S does not need to import capital from foreign countries to finance its current account deficits because this country can issue capital (OECD, 2023) defines the current account balance of payments as a record of a country's international transactions with the rest of the world The U.S current account deficit in the 2nd Quarter of 2023 reached 3.2% of GDP, a safe level (BEA, 2023) Since the early 1980s, the U.S has been running a persistent current account deficit because higher economic growth in the U.S leads to higher consumer spending and, therefore, more spending on imports However, because the US dollar has been the world's primary reserve currency since World War II's end and is the most extensively utilized currency in international trade, for example, Mark X can pay its subcontractor in Roseau in US dollars, the U.S enjoys an edge over other countries in compensation for current account deficits Other countries must rely on FDI capital flows to make up the deficit, whereas the U.S does not The U.S can sell bonds to borrow money at low costs worldwide to compensate for the lack of funds in their current accounts, all in US dollars Moreover, long-term trade deficits can pressure exchange rates in other nations but not in the United States, where there is no exchange rate issue to concern However, the trade deficit might be a poor indication for the United States because this country is borrowing from the future to buy from the rest of the world for consumption rather than investing in production Other countries are under pressure to adjust to achieve balance; however, the United States is not Therefore, it freely purchases things from other countries rather than raising savings Ethical issues around Mark X’s investment in Roseau Ethical concerns for global companies include fair wages and safe working conditions for employees, not an abuse of child labour and eliminating discrimination by sex, race, colour or creed (Faldu, 2014) It can be seen that Mark X violated business ethics standards by paying wages that were too low compared to US standards to maximize profit The hourly wage rate in the manufacturing sector in Roseau is only 5% compared with the US Most garment workers are overworked and rarely enjoy life because they have to work in poor and unhealthy environments, and their rights are not well protected The low wages prevalent in the garment industry are trapping workers and their families in a cycle of poverty Despite low wages and poor working conditions, Mark X still attracts many workers The reason is that the unemployment rate in Roseau is high, so workers only have a few choices for their jobs However, salary affects the mood of workers When psychologically inhibited or uncomfortable, productivity and work quality decrease because workers work sluggishly and uninterested If working conditions are poor and wages are too low, workers will quit to look for better opportunities For sustainable development, Mark X needed to increase wages for their workers Workers at Mark X have the right to a living wage that ensures a more dignified life where they and their families not only have enough to eat but also have access to health care and education They have the right to have time to rest and visit family and friends Female workers dominate the garment industry; low wages combined with poor working conditions are the problem of gender inequality Mothers with young children often have to pay for childcare when working overtime Low wages also mean low social insurance contributions, leading to low maternity benefits, meaning mothers lose out on essential support when they have children Therefore, paying a living wage and improving working conditions is an effective solution to solving gender inequality in a developing country like Roseau This report recommends that the government of Roseau establish a living wage instead of a minimum wage requirement for labourers Meanwhile, Mark X needs to sacrifice profit margins to increase wages and improve working conditions for employees for long-term and sustainable development Conclusion This report has talked about how global companies affected developing countries through the case study of Mark X- Roseau As a host country, Roseau could depreciate its local currency to achieve macro objectives such as improving trade balance, pushing GDP up and decreasing the unemployment rate However, using currency devaluation (depreciation) as a policy tool could increase the inflation rate Therefore, the government needs to be very careful in managing exchange rates For the U.S., although imports surpass exports, causing a current account deficit, they not need to import capital from foreign countries Last but not least, the Roseau Government and Mark X Company need to work together to improve wages and working conditions for workers at Mark X in particular and in Roseau in general for more sustainable development in the future References B Imimole, A E., 2011 Exchange Rate Depreciation and Inflation in Nigeria (1986– 2008) Business and Economics Journal, Volume 2011, p 28 BEA, 2023 U.S Bureau of Economic Analysis [Online] Available at: https://www.bea.gov/data [Accessed 06 11 2023] C.A Knox Lovell, J T P J A T., 1995 Measuring macroeconomic performance in the OECD: A comparison of European and non-European countries European Journal of Operational Research, pp 507-518 Faldu, R., 2014 Social Responsibility and Ethical Issues in Managing Global Business International Journal of Scientific Research, 3(7) Kurtovic, S., 2017 The Effect of Depreciation of the Exchange Rate on the Trade Balance of Albania Review of Economic Perspectives, Volume 17, pp 141-158 Maurizio Michael Habib, E M L S., 2016 The real exchange rate and economic growth: revisiting the case using external instruments European Central Bank Milica Delic, D K., 2005 Objectives of macroeconomics as the basis for clustering of countries in integrated Europe Romania, The 7th Balkan Conference on Operational Research Nayyar, D., 2011 Rethinking macroeconomic policies for development Brazilian Journal of Political Economy OECD, 2023 OECD Data [Online] Available at: https://data.oecd.org/trade/current-account-balance.htm [Accessed 11 2023] UNCTAD, 2023 World Investment Report, New York: United Nations Conference on Trade and Development Vieira, H., 2016 LSE [Online] Available at: https://blogs.lse.ac.uk/businessreview/2016/06/30/some-workers-winothers-lose-from-currency-depreciation/ [Accessed 11 2023]