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Is Mercantilism an Effective Form of Growth in Modern Economies: Essay
To begin with, the key question for modern growth, however, is this: ‘Does mercantilism still exist?’. In many developing nations, under one-party rule or managed by huge bureaucracies guided by industrial policies, the answer is undoubtedly, yes. On the other hand, in the modern economies, where tax reporting and collection are fairly efficient, mercantilism is much less in evidence. However, this idea of mercantilism was at its peak during the 16th-18th centuries. This time period is also known as the ‘Age of Mercantilism’. However, some economists argue that mercantilism is still practiced in the economies of developing countries in the form of economic interventionism known as ‘neo-mercantilism’. Mercantilism is an economic policy that aims to have a constant excess of exports rather than imports. This therefore teaches us that there is a limited amount of wealth (gold and silver) in the world that is required by all nations, hence introducing the point that in order to increase their wealth, their method will heavily rely on tariffs, trade leverage and military power. Exports make an economy richer because they bring money into the economy. Imports enrich competitors at the economy’s expense. However, this means that both parties rely on a relationship in which one nation wins and the other loses. This relationship lends itself either to an involuntary trade relationship or to trade wars in which both nations mutually ratchet up tariffs. This is not beneficial for economies, therefore this cannot be implemented if modern economies want to strive and grow, as a sense of openness and peace between nations is needed in the modern world today, and will cause nations to be at a state of vulnerability if for example, the majority of their wealth is being spent on tariffs. A country works more efficiently if they are trading with other countries, and specializing in their own goods or services. Further reasons and flaws suggested by Iyanu Dare, as to why mercantilism is not an effective form of growth in modern economies are that ‘it promotes exploitative rather than independent growth’.
A prime example of a country which has successfully achieved many things, such as economic growth, with neo-mercantilism is China. For example, China became the manufacturing ‘king’ through a process called ‘dumping’. This is where China exposes its customers with very low prices compared to their competitors or cost of production. The reason behind this is because, with this method set in place for a long enough time, they will be able to obtain a considerable market share and finally force out competitors, which evidently places China at a huge advantage towards their competitors and other nations. “The government is centralized, controls capital movements, discourages imports and encourages exports. From these exports, China builds up enormous foreign reserves, which gives the government extra power in monetary and fiscal policies” (Peter Pham). With their competitors out of the picture, GDP growth has averaged almost 10 percent a year, and more than 800 million people have been lifted out of poverty. This obviously reflects China achieving economic growth historically, which gives us an idea of how they will continue to grow in the modern world. As a result, with more power, capital goods, labor force, technology, and human capital, it reinforces the point that mercantilism is an effective form of growth in modern economies.
In order to further validate my claim, another argument that should be considered that simultaneously favors this question is that benign mercantilism, the idea and aims to protect domestic welfare and stability, actually allows the economy to meet its macroeconomic objectives of economic growth and low unemployment. When the nation focuses on itself, it will be able to develop enough resources to be able to rely on themselves, needing less amounts of trade from other countries. Other ways of doing this is through malevolent mercantilism, where the country tries to increase state power. The act of protectionism is the theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports. With this more job vacancies can be brought up, allowing there to be less unemployment, and hence more money flowing into the economy, which can be used to be reinvested, eventually improving the standards of living as well, in the nation. An example of a clear benefit is that President Trump placed tariffs on steel imports to try and protect jobs in the US steel industry. In addition to this it diversifies the economy tariffs and protectionism can help develop new industries to give more diversity to the economy. Raises revenue for the government which can be reinvested into healthcare or education. It can protect certain key industries from international competition to try and safeguard jobs.
However, this cannot be considered as the most economically efficient, as other nations may be able to provide goods at a lower price than can be achieved domestically. This brings me onto my next point about specialization. When each country specializes in certain goods or services, that they will be able to thrive in, they will be able to trade their goods and services, or import necessities for a cheaper cost than producing it domestically. For example, Adam Smith (Scottish economist) talks about Scottish wine in an attempt to truly express the harmful nature of tariffs. He stated: “The natural advantages which one country has over another in producing particular commodities are sometimes so great that it is acknowledged by all the world to be in vain to struggle with them. By means of glasses, hotbeds, and hot walls, very good grapes can be grown in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines merely to encourage the making of claret and burgundy in Scotland?”. Foundationally, he is making a point that high quality grapes can be produced in Scotland itself, but the extra costs of heating it and providing it with necessary attention would make Scottish wine 30 times more expensive than French wines. This overall reinforces the point that it would be better to trade something Scotland had an abundance of (such as wool) in return for French wine. As France has a competitive advantage in producing wine due to its southern climate, tariffs aimed to create and protect a domestic Scottish wine industry would just waste resources and cost the public money. Therefore, this would be a win-win situation where Scotland would save time and resources to gain wine and France would simultaneously save time and money to accumulate Scottish goods such as wool.
Strengthening my point even further is that if nations were to focus on distributing domestic goods around themselves, without the help and acceptance of openness from other nations, they are at risk of depleted raw materials and resources, fundamentally because mercantilism is based on the complete use of natural resources, even though it is scarce. Non-renewable resources will eventually run out. If that happens sooner rather than later, then the entire economy will fail, contradicting the idea of economic growth and other macroeconomic objectives, such as unemployment, inflation, and government spending.
Additionally, we can see that Africa’s interaction on an international scale has had positive impacts and has allowed them to grow. According to The Economist’s article ‘The new scramble for Africa’, “Greater openness to trade and investment is one reason why GDP per head south of the Sahara is two-fifths higher than it was in 2000. Africans can benefit when foreigners buy everything from textiles to holidays and digital services”. This comes to show that when countries work together and specialize in something specific that will be beneficial for each other, they will be able to economically grow (this is the recurring point of specialization). Moreover, African leaders do not have to choose sides, as they did during the Cold War. They can do business with Western democracies and also with China and Russia and anyone else with something to offer. Because they have more choice now than ever before, Africans should be able to drive harder bargains. And outsiders should not see this as a zero-sum contest. If China builds a bridge in Ghana, an American car can drive over it. If a firm invests in a mobile-data network in Kenya, a Kenyan entrepreneur can use it to set up a cross-border startup.
Ultimately, this leads me to the conclusion that this question of whether mercantilism is an effective form of growth for modern economies, is arguable to an extent in which it portrays that nations can either grow independently, embracing multiple methods such as protectionism and relying on tariffs. But they also heavily rely on personal resources which are scarce. Further validating this would be the acts of specialization and trade between countries, which can help provide for the welfare and stability of different nations reinforcing that there are multiple effective strategies other than mercantilism.
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