The market economy emerged and became a new variable

MBA Coordinator, SZABIST
June 09 - 15, 2003



Power has been the major quest for human beings since known history. In Stone Age, a person or a group who possessed any thing (we can call "weapon") by which he could kill maximum number of people was supposed to be a powerful leader. Week, feeble people had to follow the instructions as they had no options.

The same thrust of power forced power hungry leaders to fight two world wars as they had an urge to conquer the world; but history tells no one could ever succeed. After World War-II world had moved from armed power to trade powers that gave boost to capitalism.

The market economy, an economic term emerged and became a new variable by which world's powerful nations proved themselves as one of powerful countries with new identity like Japan, Germany, China and others. According to market economy, a nation whose Balance of Payments is in surplus has favorable Terms of Trade (TOT). To improve terms of trade, countries increase their exports and try to reduce their imports to target trade surplus.

To improve TOT few countries really worked hard and innovated good marketable products and machinery and captured world markets. Their hard work made them member of developed countries of the world. Few countries were blessed by nature and were lucky to excavate natural resources in the shape of oil and gas like Middle Eastern countries. These developing countries improved their balance of payments by exporting natural resources to the world. In return they imported infrastructure, better communication system and enjoy excellent quality of life. But there is nothing without ifs and buts in life; hence they are exposed to concentration in only one sector/industry; as stated in Rybczynski theorem, a renowned theory in international economy.


Acquiring more natural resources such as discovering new oil fields can retard development in other industries because of the Dutch Disease. Reliance on natural product only like oil, would cause concentration in that sector only, which will attract labor, capital and other input factors cannibalize the share of other sectors result retardation and cause de-industrialization and biased growth in a particular sector at the cost of others.

On the other hand, few great nations kept themselves busy in more than one fields and diversified their portfolio by working hard not only in consumer products, natural resource excavation but in technology as well. They invested a huge capital in research and developments (R&D) and well diversified their human resources and capital in almost all walks of life. They advanced more in value-added goods, whose raw material/inputs were mostly provided by less developed countries (LDCs). They export value-added goods back to the same LDCs at higher prices from where they imported raw material for the same. It is only possible when one has innovative technology. Hence they enjoy good profits that ultimately improve their Terms of Trade. Apart from technology and novel products they invested heavily in oil producing countries in the shape of foreign direct investments by setting up oil refineries.



So we discussed two different types of economies, ones who diversified their resources in different industries and others who concentrated only in one industry like agriculture, oil, gas etc. Concentration infects their economies with Dutch disease, means over relying on one industry and retardation in other industries that drag them into de-industrialization in the long run. The price of their only product is also decline as they sell primary products to developed foreign countries. On the other hand, diversified countries put efforts in all fields including defense industry and are equipped with high tech weapons and artillery. In other words we can say that they are not only strong economically but also have force to protect their resources, assets and interests. The weapons of mass destruction and technology pulled us back towards Stone Age, where the ritual was that leaders were those who posses power either physical or material.

After World War-II someone asked G.B. Shaw, "How do you think World War-III will be fought?" He replied, "He did not know about WW-III but if World War-IV will take place, it will be fought with stones and pebbles".

1991 Gulf war cost US an additional $61 billion. However, $54 billion was offset by contributions of other members in coalition. Two-thirds of the $54 billion was provided by the Saudi Arabia, Kuwait and the UAE ($36 billion) with the remaining one-third mostly provided by Japan and Germany ($16 billion). Payments were made in one of two ways: with financial assets ("Cash") and with services such as sealift and airlift ("In-Kind")

Source: Conduct of the Persian Gulf War, Final Report to US Congress by US Department of Defense; April 1992; Appendix P.

Saudi Arabia provided US Military with fuel, food, water, local transportation and facilities, accounting for the "In-Kind" assistance. This accounted for 25% of the Saudi commitment to the US Military presence and was 71% of all "In-Kind" contributions. The US paid roughly $7 billion, less than 12% of the total war cost and less than half what Saudi Arabia and Kuwait paid. Apparently war was financed by above countries; but does anyone know, in fact who financed that war? The answer is global fuel consumers. The price of oil before war was about $20 per barrel, which rose up by 100% to $40 per barrel. Oil companies earned about $60 billion profit. Who own oil companies? The answer is obvious, those who deserve ownership, means developed countries, which had already invested huge initial capital in this sector in the form of infrastructure, communication systems and improved living standards. It is lucid that people bore the cost of war.

Gulf war gave hype to the economic wars. Few political critiques stated that 2500 km long gas pipeline project is the basic motive behind Afghan war. Now the Iraq war again targets Iraqi oil reservoirs, a natural resource, a commodity. Iraq has more than 12 percent of the world oil reserves. Press has already pointed out that American firms will take over control of Iraqi oil fields.

This situation takes us back to Stone Age, where commodities were more valuable and people fought to gain control on resources. The most powerful person was considered the one, who possessed most lethal weapon. The same goes to for the present war that is targeted for material acquisition and to gain control over natural resource, a backbone of all human development, and power still lies with most powerful nations who possess most lethal weapons. Technology is the only difference. This is a lesson for less developed countries that they should not rely on one or few primary resources but must diversify to avoid Dutch Disease mentioned in Rybczynski theorem.