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Economic Security and Economic Interdependence


What is Economic Security?
 

Economic security is defined as the ability of people to consistently meet their needs. Economic security is also an important factor in assessing a country's national security and is thus important for both citizens and states.

Economic security is the first step in creating economic prosperity. Actors in an economy that does not inspire trust cannot be expected to function well. Establishing economic security is also an important task of the modern state, which is tasked with providing basic guarantees for the security and well-being of its citizens.

Global developments help determine a country's economic security strength. We can say, for example, that the Covid epidemic, political instability in some countries and the threat of regional wars have significantly increased economic insecurity in recent years. Given this uncertain and fearful environment, it was not surprising that countries around the world moved to more conservative economic policies and tried to stock up on commodities and raw materials for years to come.

Economic security feeds not only on measurable economic or physical conditions, but also on the "perception of security." Once the sense of security fades, people can no longer plan for their own future and/or that of their children. As a natural consequence, the "brain drain" may increase. This can ave consequences that can endanger a country's national security.

 

Factors Determining Economic Security

 

What the factors are that determine economic security and how they work may vary somewhat depending on the current period and conditions. However, the generally accepted criteria are as follows:

  • Food consumption
  • Food production
  • Social living conditions
  • Income per capita
  • Capacity of the state and non-governmental organizations

 

What is Economic Interdependence?

 

Economic interdependence is when two or more individuals, groups, companies, or countries need to exchange goods and services with each other to meet their needs.

Economic dependence occurs when the parties specialize in or monopolize the production of a particular good or the provision of a particular service. The exchange of these goods and services is necessary to meet the needs of both parties. Continued economic interdependence becomes a system in which companies and even countries eventually become economically interdependent.

We had the opportunity to see one of the most striking examples of economic dependence in the current period. On the one hand, we have Russia, which has to sell oil and natural gas to European states to maintain its economic power and security; on the other hand, we have Europe, which despite conflicts of interest has not been able to cut off its energy supply from Russia, in the face of military polarization and even an ongoing war.

 

International Trade and Economic Interdependence

 

One of the best and simplest examples of economic interdependence is international trade. If trade takes place between two or more countries, one of them may not be able to produce a product or not be able to produce it affordably. The other country may be successful in producing that product or may produce it cheaply.

For example, Asian countries with temperate climates can produce certain regional fruits, rice and cotton in abundance. Other countries that cannot grow the same crops themselves due to weather conditions, humidity, or other reasons must import them from Asia. Similarly, some goods or products that cannot be produced in Asia are also imported from other countries. This system makes different countries economically dependent on each other.

 

Large Retail Chains and Economic Interdependence

 

Another type of economic dependency revolves around chain stores. Retail giants, for example, sell products from hundreds of small companies on their shelves. The survival of these companies depends on the steady flow of products from many small producers. On the other hand, we can say that all these small businesses have become dependent on retail chains for the sale of their products. In other words, both parties depend on each other to fulfill their needs.

Note:

The phenomenon of economic dependence also occurs in developed economies. For example, huge economies like China and the U.S. specialize in producing almost all kinds of products and technologies, but they also depend on other countries, especially for energy and raw materials.

 

Specialization and Economic Interdependence

 

It is quite easy to find real examples of economic interdependence because it exists almost everywhere. We would not be wrong to say that all companies, organizations and countries are deeply rooted in the vortex of economic interdependence. However, this situation also has a positive consequence: specialization.

It is inevitable for a company or a country to specialize in the production of certain products and services. Specialization leads to higher productivity and better quality. For this reason, companies tend to focus on the production of certain products and outsource the rest. In an environment where the supply chain is running smoothly, it would be a logical strategy for a company to outsource some products, thus increasing its capabilities and skills in its core business. However, if the supply chain is disrupted for any reason, this advantageous situation gives way to profound problems.

 

Industrialization and Economic Interdependence

 

Industrialization increases productivity in production and ensures the development of economies. However, when we talk about industrialization, we must also accept that raw materials, energy, technology and many other inputs should be part of the system.

Industrialization increases outsourcing and economic dependence. Let us continue with an interesting example: did you know that Pakistan is the leading country in the production of footballs? However, before it got to this point, it got the technology from China and still imports the materials needed to make soccer balls from China.

 

Economic Development and Economic Interdependence

 

As an economy develops and the level of technological infrastructure increases, it focuses on building more facilities and producing more value-added products. This creates needs such as the supply of raw materials and labor from neighboring countries or other regions. Countries with developed economies trade in large quantities, and their interdependence with the countries with which they conduct this trade increases.

Citizens from economically developed countries begin to concentrate in more lucrative and prestigious business fields over time. Some "lower class" jobs or low value-added sectors that need to be done are either owned by different ethnic groups living in the country or are imported from other countries. This situation can be described as economic interdependency on another level.

 

The Good and Bad Aspects of Economic Interdependence
 

Good Aspects:

  • Economic interdependence leads to more business opportunities. As trade and commerce between countries increases, the knowledge transferred will open the door to new opportunities within the country.
  • Selling the same products in a region triggers fierce competition. This competition can drive prices down and reduce profitability. However, selling to different regions is both profitable and easy. If you take the product from a place where it is found in abundance and bring it to a place where it is scarce, you are actually trading.
  • Another important benefit of economic interdependence is diversification. Countries with a developed trade culture can minimize their risk by taking the path of diversification, even if they are dependent on foreign countries for some sectors. Relying solely on the domestic market or a single foreign market can expose you to increased risk during economic crises, political tensions, natural disasters, etc. To achieve different and quick solutions to these problems, a mutual economic dependency relationship can be established with more than one institution or country as a supplier.

Negative Aspects:

  • Fluctuations in exchange rates, energy markets, and commodity prices can increase your costs in unpredictable ways and shake your trade balance.
  • In the event of a catastrophe (regime change, economic collapse, financial crisis, natural disaster, etc.) in the region to which you supply products or raw materials, all commercial activity may cease.
  • Political tensions between countries may prevent trade in some cases. Import/export quotas or bans may be imposed and tariffs may be increased at deterrent rates. In fact, many countries, particularly the U.S., have stopped buying some products from Russia or have limited their buying volumes following the conflicts between Ukraine and Russia. Due to this situation, we can assume that there are many companies in various countries whose business activities were interrupted or even came to a halt.

 

The Relationship between Stock Exchange and Economic Interdependence

 

On the axis of economic interdependence, there are multiple relationships between stock markets and countries. When we examine stock market price movements, particularly the characteristics of prolonged bull or bear seasons, we see that international relationships and macroeconomic data lead markets with the snowball effect.

Imagine that companies operating in a country are ahead of their competitors in a technology or a particular area. That company's stock will most likely increase in value.

Let us imagine a scenario where a country's economy is subject to foreign intervention and sanctions. It is not possible that the country's economy, currency or companies will not suffer and lose value.

We must accept that this situation will have serious repercussions on the entire world economy when the strong economic interdependence between countries is combined with strong political and/or military conflicts. In fact, events such as the Covid epidemic, the tensions between China, Taiwan and the U.S., the tensions between Russia, Europe and the U.S. and their subsequent transformation into a war between Russia and Ukraine have affected the prices of almost all currencies, stock markets and shares traded on these exchanges. While the currencies of developing countries depreciated, commodity prices rose "insanely".

In conclusion, we can say that there are extremely strong links between the stock market and economic interdependence between countries. Investors who managed to analyze this spiral of relationships most accurately had the opportunity to make high profits on the financial markets during this period, when volatility was also quite high.