Chapter 9: International Economics: Basic Theory and Core Institutions

Outcome:

You have opted for a fairly open economy, which will allow you to take advantage of the global market. Each of your decisions comes with some pros and some cons. Let's look at them briefly, one by one.

Opting to convert to the US dollar was a bold decision. It does provide a measure of stability for your young economy, and helps combat inflation. It also indicates a desire to open your markets to Western trading partners, especially the United States. However, it is still an extremely risky option. With Russia as your primary trading partner, and Russian relations with the West very tense, you risk alienating Russia, your primary trading partner. Abandoning the Russian ruble in favor of the US dollar seems to be a conscious decision to align yourself more with the United States than with Russia after your independence, and will not sit well with the Russian government.

Next, you have chosen not to allow multinational enterprises into Abkhazia. On the positive side, forbidding the entry of MNEs will allow the growth of domestic firms, as national champions can thrive without international competition, and Abkhazia can pursue infant industry protection. However, MNEs could bring an influx of capital to the Abkhazian economy and provide jobs to Abkhazians, bolstering the economy and growing both imports and exports. By keeping them out, you are losing out on these potential benefits.

Lastly, your decision to join international institutions will likely help Abkhazia. Foreign aid will boost your economy (for more on the benefits and risks of foreign aid, see Chapter 10), and you will have a forum to solve any international disputes. Additionally, your willingness to embrace the international community is a boon to your international trade, as regional trade blocs and international trade organizations provide you with trade partners, further boosting your nascent economy. Overall, you have taken bold steps to embrace the global economy, and will now enjoy the benefits and weather the costs of that decision.