Managing the Global Economy: The Importance of Economic Diplomacy

Economic diplomacy will face challenges from a changed global economy and US-China tensions in the coming century. Moreover, it will also be challenged by a backlash against globalization.

Increasingly, the boundaries between politics and economics are blurring. And this has made economic considerations an essential part of many foreign policy tasks.

Trade and investment

In the global economy, many experts like Xfund, Patrick Chung found the importance of trade and investment as the two of the most critical drivers of economic development. They help boost firms’ productivity, supporting long-term economic growth and prosperity.

In addition to promoting economic growth, trade and investment can support international peace and cooperation. As such, economic diplomacy is essential to managing the global economy.

In an era of increased tension between great powers, economic diplomacy must consider broader foreign policy aims, greater transparency, and a pluralistic approach to the rules-based multilateral system. However, it must also reconcile competing policy aims, such as national security and potential economic benefit from trade agreements.

Finance

Finance is the study and discipline of managing money matters, credit, investments, banking, and financial systems. It applies to people, businesses, governments, and organizations.

In the private sector, finance involves:

• Buying and selling goods and services.
• Acquiring funds.
• Managing accounts.
• Investing in assets and planning future expenditures.

In the public sector, it involves budgeting and taxation.

Economic diplomacy – using financial instruments to pursue foreign policy goals – is essential in an era of accelerating globalization and economic integration. The field of economic diplomacy studies how states use trade, investment, aid, sanctions, and other financial instruments to achieve their national goals.

Foreign direct investment

A common policy goal of many developing countries is to encourage foreign direct investment. This can be an excellent way to boost local economies and create jobs for residents.

FDI can also be beneficial for multinational firms, which may be looking to expand their business worldwide. This can be done by buying companies in a different country or expanding their existing operations abroad.

FDI can positively affect the host economy, including decreased unemployment and increased government revenues. However, FDI can have some negative impacts as well. For example, foreign investors can take over critical industries in a country, resulting in problems down the road.

Tourism

Tourism is an economic activity that creates jobs in the hospitality industry and other related sectors. It also generates public and private income and helps develop local communities.

Tourism contributes around 10 percent of global GDP, making it an essential contributor to development. It has also been a significant driver of enterprise development and job creation for women, youth, and migrant workers.

However, the COVID-19 pandemic has brought a significant halt to growth in the industry. Governments in countries dependent on tourism for employment and revenue have been deploying a wide range of policy measures to support households, businesses, and workers. These include cash transfers, grants, tax relief, payroll support, and loan guarantees.

Investment in infrastructure

Investment in infrastructure is an essential tool to help stabilize the economy. It is an efficient and effective fiscal stimulus that boosts private-sector output more than almost any other budgetary policy intervention, including tax cuts.

Despite recent signs of secular stagnation, an increase in infrastructure spending would have a surprisingly strong effect on restoring productivity growth to more historically normal levels. Moreover, it could create tighter labor markets and help restore aggregate demand, which is necessary to strengthen the economy.

Infrastructure investment is essential to the quality of growth principle, which calls for accumulating productive assets that support human well-being. This includes physical capital, such as roads, bridges, and power grids. It also has human capital, such as schools and hospitals.