THEORY OF GLOBAL BUSINESS PREDICTION
World Economics
Ainabek Kuandyk Salikhuly
Dr. of Economics, Prof. of Economics, Academician of International Academy of Informatization
Works as Director of Scientific and Research Institute for New Economy and the System analysis under Karaganda Economic University of Kazakhstan’s Consumer Association.
100024, Republic of Kazakhstan, Karaganda, st. Tattimbeta, Building 3, Apartment 69. Home phone: 8(7212) 33-28-73, (е-mail: ainabek@mail.ru)
Abstract
This research paper discusses different perspectives on the problem of determining the effectiveness of international economic relations and identifies modeling approaches of of prediction of the global economy.
Keywords: theory of absolute advantage, comparative advantage theory, the theory of comparative costs of production, capital export, export, import. Forecasting and modeling the global economy; continental economy.
1 METHODOLOGY FOR DETERMINING EFFICIENCY OF INTERNATIONAL BUSINESS RELATIONS
Global business has been formed by development of international economic relations, in particular, trade. These processes set a task to the economic science: determining efficiency of international trade and international economic relations. Therefore, for the first time in the economic literature, there appeared statements by mercantilists who believed that “the state should sell as much as possible in the external market and buy as little as possible, accumulating the gold – the basis… of wealth” [1, p. 479]. These ideas received further development. Thus, A. Smith, a representative of the classical school, remarked that “if any foreign country can provide us with a kind of goods at a lower price than the one at which we can produce it on our own, it would be much better to purchase the goods from it in exchange for a certain part of the product of our own industrial labour applied in the area where we have a certain advantage” [2, p. 333]. A. Smith’s research of international labour distribution as the ground of export and import relations and determination of the states’ economic capacities brought about the conclusions which were further named as the theory of absolute advantage [1, p.480].
Of course, the speculative, general provisions by A. Smith did not satisfy the followers of this problem research. In the theory of world economy on the above-mentioned problem, a considerable contribution was made by D. Ricardo [3, p. 272]. He developed the theory of international labour distribution comparative advantage and determined the specifics of external economic links. “D. Ricardo’s achievement is the proof of advantageousness of trade between the countries even if the country’s economy is highly efficient. The researcher showed that exchange via external trade makes sense even in the cases when the country produces all the goods at higher production costs than other countries but given that the difference between comparative costs in the country is higher than in other countries” [1, p. 480]. In his economic work D. Ricardo used the example of exchanging Portuguese wine for English woolen cloth and determined that absolute characteristics can not be followed because the orienting point at the relative effect is more convincing [4, p.117]. In the economic literature, D. Ricardo is considered to be the founder of the theory of comparative advantage or comparative production costs [3, p. 268].
With regards to this D. Ricardo’s development, P. Samuelson expressed his opinion saying that “… the theory of comparative advantage… is an orderly and logical theory. However, it should be admitted that if we apply it hastily and uncritically to analyzing the realities of life, it will appear to be very simplified or even too simplified a theory. However, with all its excessive simplicity, the theory of comparative advantage contains a rather important grain of truth. It can be even said that there are few principles of economic theory as rich in contents as this theory. The nation ignoring the principle of comparative advantage would do it at a heavy cost – decrease of life standard and slowdown of potential economic growth rates” [3, p. 272-273].
Judging by P. Samuelson’s analysis and conclusions on D. Ricardo’s development of the theory of comparative production costs or comparative advantage, we can say that the theory requires deeper investigation and a scientific approach, covering the very reality to a greater extent, taken into account the pricing variables influencing the development of external trade and international economic relations. Let us note here that D. Ricardo’s intuition did not fail him in the correct definition of the principle of comparative advantage, which could not be said about his proofs made on individual, feigned and simplified examples far form the very reality influencing external trade operations. Thus, for instance, P. Samuelson, criticizing D. Ricardo’s approaches on development of the theory of comparative production costs, particularly pointed out the following weak points of the author’s reasoning: “A more serious fault of the principle of comparative advantage is, probably, its static nature. This theory ignores any fluctuations of prices and salary, it abstracts away from any inflation and deflation gaps at the intermediate stages, from various problems of payment balances. It is based on the fact that, if workers leave one industry, they do not turn into the chronically unemployed but by all means move to another industry, a more productive one. To the extent we can in the future rely on successful application of neoclassical synthesis mobilizing modern theories of monetary and fiscal policy for the purpose of liquidation of chronic falls and inflation – the old classical theory of comparative advantage acquires social meaning again” [3, p. 272]. Here P. Samuelson, defining the comparative advantage, focuses on the values lying “ad interim production costs”. Specifying the criteria of the definition of comparative advantage, he writes: “… while between both countries there is a difference in relative efficiency in production of various goods, one can always make sure that the poorer country has a comparative advantage with regards to the goods in production of which it has relatively more efficiency; the same poorer country will be in a comparatively unfavourable position with regards to the goods in production of which its efficiency is below average” [3, p. 269].
These assumptions in defining the common criterion for assessment of the comparative advantage appear to be the ways of searching for a scientific solution to the problem. But the scientific approach to solving the problem needs basing on the vehicle of functioning of the value law within the countries in question.
The authors justifying the need for economic relations and external trade concentrate on particularities omitting or not seeing in-depth, essential processes conditioning determination of methods of the common criterion of comparative advantage assessment. Thus, for instance, in the 20-s-30-s of the 20th century Swedish economists E. Heckscher and B. Ohlin created a theory according to which “the goods requiring considerable (maximum) expenses of surplus production factors and small (minimum) expenses of deficit factors are exported in exchange for the goods produced with using the factors in the reverse proportion” [5, p. 227].
However, the theory of Heckscher – Ohlin was refuted by V. Leontiev while he was researching the external trade of the USA in 1947, 1951 and 1967, when import not export proved to be more capital-intensive. “During the post-war period the American economy specialized in those kinds of production which required relatively more labour than capital. It contradicted the previous ideas on the US economy which, due to the excess of capital, should have exported mainly capital-intensive goods” [5, p. 228]. “Leontiev’s paradox” has different explanations:
1.”The highly qualified American work force requires more expenses on its preparation. …
2. Production of American export goods involves large amounts of imported mineral raw materials in extraction of which huge financial resources have been invested (from the USA)” [6, p. 42].
The contemporary economic literature offers various theoretical provisions explaining the need for external trade relations and international economic links. In the second half of the 20th century the theory of the “product life cycle” appeared, developed by R. Vernon, Ch. Kindleberger and L. Wells. The theory notes that the product has a life cycle consisting of the stages of introduction, growth, maturity and decline, based on which an explanation of economic relations between the countries is given. Proceeding from the cycle, the countries are oriented at production of the same product at various stages of its export maturity [5, p. 228].
Furthermore, an extended explanation on the problem is offered by the theory of competitive advantages by M. Porter. Here the primacy is given to competitive firms, and then the significance of the country in the process is determined. A conclusion on the competitive ability of the country is made from the following conditions:
- factor conditions (availability of primary factors of production in the country);
- conditions of the internal demand resulting in the scale effect;
- availability of allied and support industries (clusters);
- the firm’s strategies and its place in the intra-industry competition [5, p. 232].
There are provisions making the above-mentioned theory more precise, and one of them is the “model of the technology gap” by M. Posner. It emphasizes a new factor of availability of technological advantages in the country – innovator, which conditions international trade up to the moment when the gap is overcome [5, p. 231]. In addition, the need for international economic relations is explained by the model of internationalization developed by P. Buckley, M. Casson, A. Rugman and D. Dunning. They refer a considerable part of formally international economic operations to intra-firm relations of large business complexes (TNCs) [6, p. 48 - 49].
One more theory is the popular eclectic model by D. Dunning, according to which the firm makes direct investments because it has specific advantages of the owner in the given foreign country, internationalization and location [6, p. 49].
All the existing theories explaining the need for international economic relations are based on the main interest of the owner of the process in gaining the maximum profit in the environment of concentration and centralization of production, which predetermines import of capital and goods from the country. It was mentioned even by D. Ricardo, K. Marx and J.S. Mill. In the “Principles of Political Economy”, the course book published in 1848, J.S. Mill wrote that «the countries still considered to be barbarian… where the process of civilization has just started… can have the capital migrating to them only given the prospect of gaining a really high excess profit” [7, p. 337].
The explanation of international economic relations based on excess profit gained by the countries exporting goods and capitals and on leveling conditions of production development of the importing states appears to be obvious, lying on the surface. However, justifying the objective need for international economic relations requires taking into account the operation of the system of economic laws: the law of demand and supply, the law of value, competition, etc.
Determination of the socially necessary materialized and live labour costs, their correlation as objectively limiting values proceeding from consideration of all or most factors influencing them appear to be basic and main points in detecting the need for international economic relations in increasing the efficiency of each of the countries participating in the process and common advantage for all cooperating states.
Therefore, first of all, the socially necessary (objectively limiting) values of materialized and live labour costs and their correlation per country, taking them into account among themselves in the process of commodities exchange are determined. Then the objectively limiting values are calculated by kinds of commodities available for exchange between the countries. The received results of average correlations of materialized and live labour costs in the latter case are compared with the objectively limiting values of correlations of materialized and live labour costs. They are determined by the data on the commodities exchanged between the countries. If the objectively limiting values of correlations of these costs are higher than the same indicators upon the whole in each country, these external economic deals will have a positive assessment and they will serve as factors of efficient development of various national economies. Otherwise, according to the situation described above, the external economic activity will appear inefficient.
Thus, in defining the common criterion of assessing efficiency of external trade operations and international economic relations it would be not enough to be guided by only the excess profit or profit which appear to be final results and express only the interest of the owner of the external economic process but not that of the entire country and, moreover, not that of the other state taking part in these economic relations. Therefore it would be better to choose the indicators determined as objectively limiting values of materialized and live labour costs inside the country as a whole and commodities exchanged between the states, as numerous factors predetermined by the operation of economic laws would be taken into account here.
2. MODELLING GLOBAL BUSINESS PREDICTION
Predictions of global economy development are modeled by traditional methods, on basic, factual materials, using mathematical tools at the level of determining probabilities of appearance of limited individual factors in the future. This prediction is traditionally not based on the requirements of the vehicle of operation of the economic laws system, as contemporary researchers are mainly occupied with studying the surface part of economic laws manifestation.
In the contemporary course books on global economy there is no methodology for researching global business based on the requirements of the economic laws system. The materials available in the course books are a set of factual materials by countries acknowledging international economic relations, development of integration processes [8; 9]. At the same time the lack of in-depth understanding of global business on the level of essence and methodology for researching the process as an organic whole does not allow making full-fledged prediction.
At present, for the purposes of research, global economy is divided into sectors: of labour, natural, raw, material, technological resources, etc.
Based on the theories and methods of the inter-industry balance by V. Leontiev [10] and the system of national accounts by R. Stone, there are attempts to forecast and predict global business [11]. The inter-industry balance by V. Leontiev can be used, in part, in determining the commodity flow in physical terms [12, p. 263-275]. And consideration of financial and monetary relations in the system of national accounts by R. Stone will not give an objective vision and prediction of global business either, as this methodology lacks requirements of the vehicle of operation of the economic laws system, the theory of extended reproduction of economy.
Modeling of global business for the prediction period should be built stage by stage. At the first stage the models of interregional business, i.e. of interstate economic relations should be determined. These relations can be bilateral or multilateral. Then a transfer can be made to formation of the model of continental business. After that economic links between continental economies should be established, which should lead to modeling of global business.
All the above-mentioned models should be formed on the basis of determining the common criterion of assessment of public production [12, p. 227-251] and extended reproduction [12, p. 263-287]; the system of national accounts and methods of distribution of the physical bulk of commodities by industries, regions and continents can be used as additional tools.
For instance, let us attempt at modeling prediction of interregional business (see Chart 1). Let three national economies, neighbouring within the territory, take part in the process, marked as A, B and C. Export and import, financial operations, sale and purchase of goods, capitals and services are performed between these countries. The share of the external economic relations in the GDP of the national economy should be taken into account here. If this figure equals or exceeds 20% of the national GDP, the external subject with its parameters of the economic activity should be included in the set of the analyzed integrity objects, as it is determined from the practice of global business that the share of external economic operations below 20% of the GDP did not have such a significant influence on the national economy development. Therefore modeling of interregional business implies consideration of mutual influence of national economies of countries A, B and C, in which the share of each country’s influence is not less thn 20% of the GDP.
Chart 1. Model of determining common criterion of assessment of public production per country А, В and upon the whole for interregional space.
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Let us assume that in each of the mentioned countries there is a number of industries, and they can be similar, different, or some industries are lacking in other national economies. With regards to this situation, economic activity of all industries should be taken into account, and identical industries should be considered as one and the same industry represented by the sum of indicators from their economic activity. It is one of the approaches. In another option, all industries of the countries should be taken into account both as an integral social and economic organism and separately, with due account for determining the common criterion of assessment of public production, based on interregional business, i.e. the sum of two national economies A, B. Thus, country A has 40 industries, B – 30, and 15 industries in these countries are identical in the line of economic activity. Based on these industries of the countries, let us create the following model of determining the common criterion of assessment of public production, which will make it possible to calculate the density coefficient of interconnection (K) between the industries and the countries.
The coefficient is calculated by the following formula:
К= ki : k∑ n , (1)
where ki is the coefficient of leading of individual costs to the socially necessary value (objectively limiting value) of the industry or the country; k∑n is the coefficient of leading of individual costs to the socially necessary value of the aggregate of the countries’ industries.
After determining the common criterion of assessment of public production, we should proceed with calculation of deviations of the factual data from the readings of the common criterion of assessment, i.e. objectively limiting values, both per country and for the sum of the economic activity results by all the countries. Then, based on each country’s industries and by their aggregate, factual and forecast conditions of extended reproduction of interregional development can be determined.
Modeling of continental business prediction is made in a similar way. The European Union can serve as a particular example. The object of research is enlarged here, the number of the countries and the industries is increased. This specific feature does not change principal approaches in modeling of continental business prediction based on determining the common criterion of assessment of public production and extended reproduction.
The results of predictions for the continental economy development should be used for modeling of global business. The sample of the chart above can also be used here; the countries will be supplemented with the continental economies with their corresponding industries.
After that modeling of global business prediction should be continued according to the developed methodology. In this research, it is proposed to elaborate a budget prediction by objects, to reduce various national currencies to a common denominator by the common criterion of assessment of public production continent-wise and within the scope of intercontinental relations.
Therefore modeling of global business is built on predictions of continental and intercontinental business made on the basis of determining the common criterion of assessment of public production and extended reproduction.
References
1. Economic Theory/Ed. by Bazylev, N.I., Gurko, S.P. – Minsk, 1997.
2. Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. – M., 1962.
3. Samuelson, P. Economics. In 2 volumes. Volume 2. - M., 1997.
4. Ricardo, D. Works. Volume 1. - M., 1993.
5. Puzanova, E.P. Global Economy. – Rostov-on-Don, 2001.
6. Global Economy/Ed. by Bulatov, A.S. - M., 1999.
7. Mill, J.S. The Principles of Political Economy. In 3 volumes. Volume 2/Transl. from Eng. - M., 1981.
8.Global Economy/Ed. by Bulatov, A.S. - M., 1999.
9.Puzanova, E.P. Global Economy. – Rostov-on-Don, 2001.
10.Leontiev, V.V. Inter-Industry Economy/Transl. from Eng. - M., 1997.
11.National Accounts of the Republic of Kazakhstan for 1999-2003. Statistic collection / Statistic Agency of the Republic of Kazakhstan. – Almaty, 2005.