Role of G7 Countries
Introduction
The leaders of the G7G8 countries set guidelines for action that provide other international organizations with the necessary impulses to come to solutions (Molle, 2003, p.123). This shows the significance of the group in determination of the world economic growth and social development. Their decisions are directly affecting all other subsequent bodies of economic growth and development across the globe. The G7 is comprised of the powerful and industrialized nations in the world. It is apparent from this composition of their group that its the body which sets the stage for most economic policies and direction to be taken in terms of development.
In Economic terms the members of the G7G8 account for the bulk of the international trade (Molle, 2003, p.123). Whoever controls the international trade automatically influences the economic decision and this means the G7 technically determines the economic system of the world. The aim of the influential informal group of powerful industrialized countries was to form a body which could be responsible in monitoring and stabilizing financial and monetary systems among member nations. Due to interdependence of the world economy the industrialized nations realized the need of having a central body which could regulate and make economic decisions to prevent a possible collapse of a member economy which could have a devastating effect on other members. Similarly after the collapse of the Breton woods system there was a necessity to develop a body which could be crucial in stabilizing the global economic system.
With time the powerful G7 group started to focus on other vital aspects of development apart from stabilizing economic systems. They realized social development was as much important as stabilization of the monetary system. A key policy change in G7 countries is to improve the performance of education and health systems while containing their costs (Verhoeven, 2007, p.4). However the policies which have been implemented by the G7 countries have not been effective and at times caused economic havoc and social injustices within their nations and across the world. The research analyzes and criticizes the policies of United States and Japan as G7 members towards economic growth and social development in the world.
Roles of United States and Japan a G7 members and Efficiency of their Policies
Stabilizing Economic Growth
United States of America
The United States accounted for 20 per cent of expansion in world real GDP during the past two decades and for nearly a quarter of the expansion during 1992-2000 (Arora, 2001, p.4) .Stability of the United States economy and its growth is positively correlated with the world economy growth due to the size of the economy. In this case the United States will at any given opportunity try to implement sound economic policies intended to boost its country economic growth taking into mind the implication of its economy to the rest of the world. Constant economic growth in U.S acts as catalyst for economic stimulation in most countries in the world. Similarly US financial system is the role model for other nations as it is known for strong, developed and efficient financial institutions which are the main pillars of a stable economic market alongside political stability. Overall US economic policy must to correct the large and rapidly growing deficits in US current account and international debtor positions (Bergsten, 2005, p.24). These policies are implemented to correct any possible economic imbalances which may result in financial and economic instability hence sustainable economic growth within the US and the world. United States in this instance is showing its concern towards stabilization of the economic growth and avoiding any economic hiccups which may be disastrous not only to its economy but the ripple effect it will have on the global economy.
The US dollar is the dominant reserve currency used by world economies therefore it makes it prudent for the US government to implement flexible policies and conditions to ensure the stability of the monetary system and foreign exchange. Despite the positive role the United States is playing towards fostering positive economic growth and crafting a financial direction to most economies it has been implicated in negative roles which have led to instability not only in United States but spreading the disaster in other regions. By November 12,2008 the Dow had fallen to 8282, a 41 per cent drop from its high of 14,164 on October 9,2007.The federal reserve had cut its target for the fed funds rate to a mere 1 ,in a desperate attempt to keep the economy from sliding into recession(Global Economic Crisis Centre,2010,p.1). Pandemonium, panic and uncertainty followed and the markets tumbled down prompting the regulatory authorities to intervene swiftly but the damage was already done and it exposed the weakness of the most trusted financial system in the world. This developed into a crisis which led to massive layoffs in the United States raising doubts about the efficiency of the policies undertaken to maintain economic growth. Economic recession affects social development initiatives by constraining economic budgets meant to assist those projects.
Where is the US economy headed (Global Economic Crisis Centre, 2010, p.1).These were confused and mixed statements raised by investors, citizens and economic interests around the world who were negatively impacted by the US recession. The recession had a domino effect which led to collapse of other economies. Efficiency and effectiveness of the unregulated financial policies meant to be the pillars of sound economic growth were questioned and alternatives were sought. Some of alternatives sought were structural reforms in the financial industry as the public could no longer trust of the existing economic system emanating from poor policy decision by the authorities.
Japan
Japan is the one of the biggest economy in the world and it is only rivaled by United States regarding its sheer size. This aspect signifies the important role Japan plays within the region of Asia and in worldwide economy at large. Its a manufacturing and service driven economy exporting its goods to almost every region of the developed and underdeveloped nations. Japans efforts at making an efficient financial structure to lift the Yen status to a vehicle currency are also crucial (Stable Currency system in 21st century, 1999, p.5).This sensitizes the notion that its important for Japan to stabilize its currency and monetary system because it will impact positively towards its own economic growth and the region of Asia. At this point, enhancing the Yens role in trade and finance will contribute to stabilizing the Asian economy (Stable Currency system in 21st century, 1999, p.4). Japan therefore, will only tend to implement financial policies which stimulate the economic growth in the region.
The MOF (Ministry of Finance) relations with private and quasi governmental financial institutions comprised a second in its relational network (Amyx, 2004, p.61). Although Japan had contributed a lot towards stabilizing the regions economy it had shifted to some of retrogressive financial and economic policies which led to the crisis in Japan and around the regions. The relationship between sensitive policy decision makers like MOF and private organization was not in good faith. Private organizations and powerful co-operations in Japan will automatically influence decision to favor their projects at the expense of the majority in the nation and the regions. This has led to political and economic interference at the cost of the economy. The policies of private and government sector co-operation should be harmonized to avoid any potential economic setbacks.
Trade
United States of America
On average the United States is among the four most important trading partners for other countries, and it is the most trading partner for 49 countries(Arora,2001,p.4).Trade and finance is closely intertwined and a nation economic growth will entirely depend on the behavior and policies implemented towards supporting and expanding trade. The US policies being a democratic free market economy has naturally pursued free market trade policies which are driven by the demand and supply. It is essential for the US government to maintain those policies to boost the balance of payments in their nation economy and ensuring the stable flow of trade from other nations which depend on the nation.
The impact of US growth on growth in other countries depends in part on the significance of the United States in other countries external trade(Arora,2001,p.4).Trade Policies which stimulate the expansion of the trade in United states favor the economic growth of most nations in the world. Demand is largely driven from the consumption side in the largest economy enabling both developed and developing nations to export their goods in US and vice versa. Income derived from foreign exchange through import and exporting of good helps the US economy to solidify its budget alongside other economies of the world.
However the free market trade policies in United States have not all been rosy and in fact have led to trade imbalances plunging the nation into debt crisis. The most alarming prospect is renewed sharp deterioration in the US trade and current account imbalances, deficits growing to annual rates of 600 billion representing 5 of the economy(Bergsten ,2005 ,p.8). Huge deficits tend to create economic budget constraints in the nation and strain the foreign exchange which in turn may lead to instability of the currency and the general economy. Trade deficits on other hand meant the country is importing more than it is exporting. The trade deficits caused by importing meant on other hand the US economy has been transferring jobs to other nations creating not only debt crisis in the economy but also a surge in unemployment. This is risk not only to United States but also the trading partners and instability of the economy in the world. Deterioration of trade accounts in US piles pressure on the dollar which is the largest reserve currency in the world. This leads to uncertainty in global economic markets.
One to be discussed shortly, is a further escalation of trade protectionism in the United States(Bergsten,2005 ,p.9).Although protectionism on one hand may be seen as an alternative in addressing the trade deficits by regulating the inflow and outflow of imports and exports it does not have long term positive effects on the global economy and trade. Protectionism hurt mostly developing nations which depend on markets like US economy because they cannot export goods and earn foreign income. Most developing economies rely on primary agricultural sectors with the produce exported. Protectionism in this case contributes to poverty and underdevelopment in developing nations by curtailing the produce. Correction of trade problems can be addressed by pursing and correcting effective free market policies. Economic reforms should be pursued to replace the existing faulty policies of trade.
Japan
Free trade is an essential component in economic growth and social development. But the area of free trade has been exploited by powerful and industrialized nations like Japan at the expense of poor and less developed economies. Japan trade liberalization has thus turned its back on less developed countries and at the same time these countries (poor nations) balance of payment difficulties (Kojima, 1971, p.29). Japan as a developed nation uses its competitive advantage, technological superiority and manufacturing prowess to stifle the economic growth of poor nations as they cannot compete with it on fair trade. In this case Japan acts as an agent of sustaining poverty and underdevelopment in those countries.
Aid and Debt Relief and Development in Developing Nations
Most developing nations rely on Economic aid from industrialized economies like United States and Japan to spur their economic growth and support social development programs. In Table 3. Index of Aid effectiveness on Donor countries, United States and Japan are not only among the largest donors of Aid but also their aid is most effective in those nations they are supporting( Gupta,2006,p.18). However aid has not led to outright economic growth and development in less developed nations. In some instances it has led to crowding out of investment and led to inability of those countries to implement their domestic economic and social agendas. It has become obvious debt is a burden on the poor countries (Warbuton, 2005, p.69). The burden of this debt has led to an outcry from activists within the developed nations and bodies like United Nations to give the poor nations debt reliefs so that they could be able to facilitate their agendas.
Conclusion
United States and Japan are important members of the G7 and the international community at large. They are the first and second largest economy respectively in the world and control a substantial proportion of the international finance system which is the cornerstone of the world economic activities. They had noble agendas in trying to implement policies which would help accelerate and stabilize the economic growth in their nations and the world. Social development and economic growth have symbiotic relationship as they both flourish together. Social welfare programs can be implemented when there is sustainable economic growth.
While the downturn (Economic downturn) has largely occurred in wealthier nations, the poor in low income countries will be the likely victims (USAID, 2009.p.1).Although the downturn was felt in developed nations its implications were catastrophic in developing nations. The policies instituted by the G7 countries like Japan and United states have an impact not only to their nations but across the world due interrelationship and economic interdependence. Loose financial regulation policies have led to disastrous economic effect like in recent economic crisis leading to massive unemployment and impoverishing their citizens. On the other hand those nations dependant on support and trade from them suffered heavily due to greedy, inefficient and selfish financial policies. The G7 nations need to take responsibility and caution in formulating their policies because of the implications they would have in the event those policies do not work out.