What is Economic Interdependence?
Economic interdependence is when people rely on others to provide the goods and services required for supporting their lives or for convenience.
Economic interdependence, a concept that came about in the 19th and early 20th centuries, was stymied initially by the Great Depression and the Cold War. The foremost global economic powers of the time raised rates against each other to fix their own economies, leading to a collapse in international trade.
When organizations, including the World Bank and the IMF, increased the level of international trade and worldwide investment, it therefore increased global economic interdependence.
Because many are unable to acquire their goods due to lack of particular skills or knowledge, ‘labor specialization’ becomes key to this reliance. It can be a complicated system involving many layers of society, including businesses and people. Labor is often separated in such a way that most people work towards providing a service or resource for other individuals/companies. People seldom work directly to source for themselves a certain good or service.
Often, economies that are advanced will trust other nations for goods and services that are not made nationwide (in their own country), again reinforcing a dependency. As a populace develops, it can either advance further to create its own required goods within its own borders, or it will continue to seek out commodities and raw materials further afield. Countries like the UK and US rely on other nations for manufactured goods such as clothing, electronics and even food.
However, note that it’s not just the manufacturing of goods that forms the reliance. Certain countries are the only ones to produce a needed product, such as oil or rice. Therefore, a heavier burden is placed on these nations to meet the demand.
Why Does Interdependence Bring Economic Growth?
With economic interdependence comes economic growth. This affiliation allows specialist industries to thrive. And, the success can lead to job and wage/salary increases and an overall improvement to wealth and lifestyle. It can be seen that with this reliance, there is less inclination to go to war. Countries that don’t have a strong economic interdependence are not necessarily threats, but they have little bargaining power. Politically strong countries seemingly benefit from economic interdependence. Nevertheless, this international trading does not reduce the threat of future wars. It is argued that despite increases in total wealth, there is still a divide between the rich and poor states around the world. While economic interdependence can create wealth, it may make developing countries more politically unsafe and/or unable to sustain democracy because of their defenselessness to global economic and market movements.
So, it stands to reason that consumption by countries with the stronger economies and governments, as well as advanced technology, can drive economic growth considerably. Consequently, when interdependence blossoms, so do trade networks—key to the flow of goods. From this world-wide trading comes globalization.
Globalization involves the goods and services, plus the economic resources of another country’s capital, technology and data. While the mixing and interdependence between the economies of different countries amplifies global connections, it also increases the growth in international trades, ideas and culture. Likewise, it brings in to question the burden on environmental impacts such as global warming, water usage and air pollution.
The Downsides of Increasing Economic Interdependence
With this in mind, some consider globalization the downside of economic interdependence. As companies become multinationals, more prevalent with the increase of internet shopping, their trading may/will impact those from whom they are receiving a product. When trading across the world, if one party fails to get resources, other parties will hurt financially, even socially.
This upsurge can lead to a widening wealth gap, especially for ‘poorer’ countries. Also of concern would be the loss of flexibility, labor abuse and shrinking resources. Nations such as the US, UK and Australia are considered to be the biggest nations of interdependence. With large economies and industries, they find they have to look outside of their borders for supplies such as gas or rubber.
Not to be ignored, the East Asian countries are serious contenders as well as the aforementioned big hitters. China has gained investments from the Japanese, Taiwanese and Korean economies, in turn forming “intra-regional trades” where the labor specialization is a comparative advantage to be with China.
Economic interdependence can have a positive effect on world trade as well as within individual countries. However, each country has to be aware that interdependence alone will not fix fundamental problems such as unemployment, or outmoded manufacturing infrastructures. It would be of benefit to invest in the education of one’s own work force, therefore increasing retention and becoming a stronger trading partner.
All parties invested in world-wide economic interdependence—from the largest multinational to an independent jewelry maker—should have a common interest in shouldering the responsibility of a stable economic structure and performance, an open economic system and a set of rules to manage global economic activity. In turn, those with a more developed economic growth would benefit from promoting world-wide economic development, especially those participating in a global economic approach.
Economic interdependence is a negotiation. It asks for a lot of give and take. Therefore, strategies have to be developed to allow the business, large or small, to better serve their customer. Economic growth and recession can affect the local economy, as well as supply and demand of a product. All of which, of course, will impact the import and export of goods and services and even trading networks.
Economic Interdependence Example
How Economic Interdependence is Key to the Auto Industry
When a car manufacturer produces a car, it will have to have the materials to do so—from the designers, the companies that provide the steel and the those that create the computers that not only run the robotics within the manufacturing plant, but also the systems that run in the cars. All of these components come together to create the car. The interdependence forms because the car manufacturer is unlikely to source raw materials itself and therefore looks outside of its borders and negotiates the best deals.