# Functional and Institutional Openness - International Economics

## Functional and institutional openness

There are three main forms of economic interaction of the national economy with the economic systems of other countries: international trade, international lending and international investment. Functional and institutional openness, as a rule, is considered in the context of these three forms.

■ Functional openness is the openness of functions performed by international trade, international lending and international investment.

Consider numerical indicators or quantitative indicators of functional openness.

International trade relations. Here the indicators are the share of exports and imports in the gross domestic product. Their combination gives an idea of ​​the scale of the links of individual national economies with the world market of goods and services.

The coefficient of import dependence K1 = M/GDP, where M - the volume of imports, characterizes the dependence of the country on imports. It is also called the import quota.

The coefficient of export openness K2 = X/GDP, where X is the volume of exports, characterizes that part of the GDP that is exported and the country's dependence on exports. It is also called the export quota .

The world export quota is constantly growing. This indicator is 27% for developed countries, 12% for developing countries and 6% for countries with transitional economies.

Statistics also use the foreign trade quota concept:

K3 = (X + M)/GDP.

It shows the share of exports and imports, i.e. foreign trade turnover of the country, in its GDP.

The sphere of international credit relations. Functional openness in this form of international relations is determined by such indicators as:

- coefficient K4 = GDP/GDP, characterizing the ratio of the country's accumulated external debt (GDP) to GDP;

- coefficient K5 = DS/GDP, which characterizes the ratio of total debt (DS) to the country by other countries (including bad debt) to the GDP of that country.

The sphere of international investment relations. There are also two indicators here (at the entrance to and exit from the country):

- coefficient K6 = Iin/GDP characterizes the ratio of the total inflow of foreign investments (investments invested by foreign investors, other states and foreign banks, companies, entrepreneurs) to the country (Iin) to the GDP of this country;

- the investment ratio K7 = I/GDP characterizes the share of the country's resources for investment, or the ratio of the total investment of this country in other countries (I) to the GDP of that country.

It should be noted that not always presented coefficients and indicators correctly reflect the state of openness of the economy. For example, sometimes export export quotas for some developing countries exporting raw materials are much higher than average. In these cases, the export quota does not indicate the degree of openness of a particular country and its involvement in the world economy, but simply about the raw material orientation of exports.

■ Institutional openness - a set of different institutions, some of which help to increase the degree of openness of the national economy, while others hinder, as well as various rules, conditions, norms and methods for regulating the movement of goods, loans and investment flows .

The sphere of international trade relations. Such methods of regulation in the sphere of international trade are tariff and non-tariff methods.

Tariff methods assume the use of different customs tariffs.

Customs tariffs by the nature of their actions are related to economic regulators of foreign trade.

■ Customs Tariff is a systematic list of customs duties that are levied on imports and exports from a given country.

The customs duty fulfills the function of the tax levied upon the crossing of the customs border by the goods, which increases the price of imported (or exported) goods and thus influences the volume and structure of foreign trade turnover.

In economic terms, customs duties perform the following functions:

- fiscal. Called to increase the revenues of the state budget;

- protectionist. Used to protect some industries of the national industry from the influx of foreign goods;

- lobbying - preferential duties. Introduced for certain countries in order to encourage the import of any goods;

- equalizing. Introduced for the purpose of equalizing the prices of imported goods with prices for goods of national production;

- compensatory. Used in case if the imported goods were given government subsidies when they are produced or exported by the exporting country;

- antidumping. They are used to counteract imports from those countries whose government provided their entrepreneurs with export premiums.

Therefore, customs tariffs remain one of the important instruments of state regulation of foreign trade, which allows it to protect national producers from foreign competition.

To non-tariff (administrative) methods include most modern measures of foreign trade regulation, whose impact on the structure, volume and geographical direction of imports and exports is much higher, than at customs tariffs.

According to the most common classification adopted by the UN, non-tariff measures fall into three categories:

- foreign trade measures, the application of which is aimed at direct restriction of imports in order to protect certain own industries. These include licensing and import quotas, anti-dumping and countervailing duties, compensation fees, voluntary export restrictions, etc.

- measures not directly aimed at restricting foreign trade and relating more to administrative formalities, the effect of which, nevertheless, restricts trade. These include customs formalities, technical standards and norms, sanitary and veterinary norms, requirements for packaging, labeling, etc.

- measures, the application of which is not directed directly at restricting imports or stimulating exports, but whose actions often lead precisely to this result.

Among the most common tools for direct regulation of imports (and sometimes exports) are quotas and licenses.

■ Quoting - these are temporary restrictions imposed by state bodies on production, export and import of goods.

The grounds for such restrictions may be the obligations of countries under international agreements, as well as the need to comply with national interests (environmental safety, cultural heritage, etc.).

Within the limits of the established quotas, the export and import of goods is carried out under licenses. According to the licensing system, the state issues a license (permit) for foreign trade operations with goods included in the lists licensed for export and import.

Quotas and licensing are also applied in cases where there is an unfair competition or damage to the interests of the state, for example, non-compliance with international treaties. Their use is based on a number of internationally agreed norms. These include, in particular, certain provisions of the General Agreement on Tariffs and Trade, as well as the Agreement on the import licensing procedure concluded within the framework of the General Agreement.

Tariff and non-tariff methods are applied only at the entrance to the country. At the exit of duties does not exist, with the exception of a number of countries, such as Nigeria, Russia and Venezuela. As a rule, at the output of the duty there are only valuable resources, mainly oil.

The sphere of international credit relations. As for the sphere of international lending, the rules and conditions for the movement of capital are set by each country and are part of its credit policy - implementation of control over the conduct and use of loans.

Here, in particular, credit limits, preferential or, conversely, tightened lending regimes, certain rules for debt management, control over loan repayment, urgency, payment, security, promotion or restriction of special-purpose loans, etc. may be set here.

The sphere of international investment relations. In the field of international investment, each country conducts its investment policy - a system of measures to optimize the structure and scope of investment, directions of their use and sources of reception in spheres and branches of economy.

Investment policy also includes various measures that stimulate investment (tax benefits, direct subsidies, etc.) in the spheres and sectors of the economy that develop and require support.

The rules and conditions for the movement of capital are established and controlled also by the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which provide loans (especially to developing countries), encourage investment activities and monitor compliance with general traffic rules credit and investment resources from country to country.

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