IB7012-8-8, GLOBAL ECONOMIC ENVIRONMENT
IB7012-8-8, GLOBAL ECONOMIC ENVIRONMENT IB7012
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NORTHCENTRAL UNIVERSITY ASSIGNMENT COVER SHEET Student: THIS FORM MUST BE COMPLETELY FILLED IN Follow these procedures: If requested by your instructor, please include an assignment cover sheet. This will become the first page of your assignment. In addition, your assignment header should include your last name, first initial, course code, dash, and assignment number. This should be left justified, with the page number right justified. For example: Save a copy of your assignments: You may need to resubmit an assignment at your instructor’s request. Make sure you save your files in accessible location. Academic integrity: All work submitted in each course must be your own original work. This includes all assignments, exams, term papers, and other projects required by your instructor. Knowingly submitting another person’s work as your own, without properly citing the source of the work, is considered plagiarism. This will result in an unsatisfactory grade for the work submitted or for the entire course. It may also result in academic dismissal from the University. IB70128 Richard Thompson, PhD Global Economic Environment Assignment 8 Faculty Use Only <Faculty comments here> <Faculty Name> 2 Abstract Economies are constantly changing around the world. China has rapidly expanded and is dominating the world’s economy as the second largest overall market. While China’s growth has exploded by hitting double digit growth rates for a 30year period, it certainly was not always this way. The People’s Republic of China has been in a state of transition for over the last 50 years. China has made such an extreme shift in the world’s economy through trial and error, that it becomes a perfect case study to analyze. Over the years China has transitioned from a command economy to a socialist market economy to a marketoriented economy. During each of these phases, not only did Chinese economists acquire perspective, but governments around the world could learn which strategies are actually successful. In the past, many people and governments believed that the more control a government has over its people, the more effective and successful the government. This concept has proven to be unsuccessful time and again and by learning from the mistakes of the past, one can avoid the mistakes in the future. As China moves into more of a marketeconomy, a number of new challenges need to be faced. The ultimate shift will require China’s government and business sector to make a number of changes to continue growth. Keywords: China, market economy, market reform, global economic rebalancing 3 Introduction China has faced a wide variety of economic challenges throughout the last century, but even with the challenges, the country has experienced significant levels of success. The economic rise from the point of collapse to such a significant level has put China on the map as a country to watch in the global economy. China experienced three decades of sustained economic growth, ranking in the double digits each year. As of 2009, the growth rate slowed to 9.8%, but the economy still remains strong (Ogrean & Herciu, 2010). One major point to note is that China was one of the few countries that successfully made it though the global financial and economic crisis stronger than ever. China also not only made it through the crisis but has thrived. The methods utilized that brought China through such a devastating period are valuable to know and understand to combat future economic issues. One of the major theme throughout this analysis will show that the willingness to open markets and participate globally is the key to economic success. In addition to understanding the background and strategies that China has used to become a powerhouse, a discussion of China’s market reforms, response to the global financial crisis, and global economic rebalancing will be provided herein. By developing an understanding of each concept, a full analysis of one of the strongest developing nations can be conducted and applied in the future. The areas that will also be discussed further in the assessment of China’s economic development includes financial crisis and economic rebalancing. As the Chinese government continues to find balance within its new market economy, its government needs to be aware of the impacts it can create with the shifts that are made. 4 China’s Market Reforms China has transitioned from a command economy to a socialist economy, and subsequently a market economy. By continuing to shift, China’s market reforms have been extensive and which as allowed its economy to grow in a number of ways. By promoting cheap labor and opening it borders to trade, China was able to grow its economy. In addition, the markets affiliated with China were able to benefit by acquiring goods at at cheaper price. By doing so, the other countries were freed up to focus on manufacturing goods that were aligned with their strengths in manufacturing. In addition, there have been extensive improvements to the quality of the labor pool which has been cited as a leading factor for the shift. China experienced double digit growth for over 30 years and has been greater than any other nation to date (Aoki & Wu, 2012). Leading economists believe that China will not be able to sustain this level of growth for much longer. One of the noted reasons is due to a country’s ability to achieve a high level income. Once it acquires a high level of income, growth is projected to slow. With this concept in mind, there is a need to reform the interest rate and the exchange rate to maintain higher levels of competition. China’s central bank currently holds a significant level of the reserve holdings, which also presents a number of risks (Aoki & Wu, 2012). Previously, this holding saved China’s economy during the global finical crisis. Another reason China has seen 30 years of significant growth is due to the aging population and the shift that has taken place within the overall demographic (Aoki & Wu, 2012). While the country experienced high levels of growth as the overall age of the Chinese people ramped up, those dividends are likely to come to an end as the population moves out of their 5 working years. China must now move into other markets and find other ways to sustain or maintain an acceptable level of growth. China’s labor market currently differs from most of the other nations that have acquired an advanced status and will have to adjust to continue to move forward. By allowing a level of flexibility into the current labor market, additional maneuverability can positively influence the Chinese economy. The high level of flexibility is said to be caused by: (a) the rapid rate of growth in the Chinese economy, (b) the high rate of employee turnover, and (c) the relative immaturity of Chinese labor markets (Aoki & Wu, 2012). The Influence of Modern Economics and China’s Reforms China’s transition from a command economy to a socialist economy, and subsequently a market economy, had a direct influence modern economics. Prior to 30 years of growth and entry into a marketoriented approach, China’s market strategies were identified as poorly implemented versions of reactionary Western doctrine (Aoki & Wu, 2012). As the implemented strategies were not seen as satisfactory in the eyes of the government and educational systems, the economists began to turn away entirely until the reforms began. As the teachers and economists from China dwindled, there now became room for other ideas to enter the country. This allowed room for teachers and economists to move into the Soviet Union. They began to migrate into China to teach about centrally planned economies. The concepts were deemed acceptable to the Chinese government and were subsequently implemented into the regime. The reform transitioned China into a centrally planned economy and was highly successful. The shift put China on the map as a powerhouse in the 1950s (Aoki & Wu, 2012). China effectively transitioned from a capitalistic government to a socialist government. Over the next period, this government type was also found to be inadequate and unsatisfactory. The state now owned most 6 of the primary assets and costs for products were being raised. In addition, innovation was being suppressed and the people of China were being negatively affected. As the Chinese began to try to find ways to improve the society and design reforms to lead them away from a socialistic st society, they were shut down. The 1 Chairman of the Central Committee of the Communist Party of China, Mao Zedong, was very much against change and doubled the governments efforts to strengthen the party. Mao Zedong pushed his country harder and further into a society where the government was all powerful. This push further down the path led to the Great Chinese Famine which killed tens of millions of people (Aoki & Wu, 2012). Overall, the individuals that attempted to provide alternative strategies moving away from a socialist nation were met with brutal treatment or death. Opposing the government was not an option until after Zedong’s death in 1976 (Aoki & Wu, 2012). After this, the Chinese people began to find relief with the establishment of a market economy. China’s Initial Market Economy Establishment China’s initial market economy started after the failure of the communist and socialist regime that originally began in 1949. As of the death of Chairman Mao Zedong, in 1976, it finally became time to rebuild. After his death, Deng Xiaoping took over and the changes from his regime began to make headway in repairing China’s economy. At this point, China began to move into a command economy and subsequently a market economy. Privatization of business once again was authorized, reducing trade barriers, and allowing foreign investors to enter progressing towards a market economy. A significant improvement was seen immediately after implementation of business privatization (Aoki & Wu, 2012). China’s next move into more of a marketeconomy required transition through various stages. Agriculture was the first area 7 tackled by reform. The agricultural sector was first reformed to allow for high levels of privatization, and once addressed, and the next sector was industry. As most of the industry was stateowned and stagnant, large scale privatizations provided allowed both the government to manufacture goods as well as private industry. The increased capacity and the removal of barriers, allowed for competition levels to increase significantly, which allowed for the next stage of change, increasing trade levels and incentivizing foreign investment (“Chinese economic reform”, n.d.). One of China’s main goals throughout the reform process was to become a member of the WTO. There were a certain set of guidelines that the government had to implement before acceptance took place in 2001. These areas that had to be adjusted included: (a) transparency, (b) judicial review, (c) uniform administration, (d) national treatment, (e) foreign investment, (f) market economy, and (g) transitional review (Yang & Rubin, 2014). While the Chinese government has met each of the criteria for entry, it remains infective at controlling human rights violations. By opening the borders and becoming part of the World Trade Organization (WTO), China’s knowledge and standards were greatly increased in addition to wealth (“Chinese economic reform”, n.d.) The next areas for reform included the services sector and the government financial sector. By entering into the WTO, the services sector was impacted. Banking, financial services, insurance and telecommunications were no longer solely reliant upon China’s weaknesses or failures. As the banking system was now at least partially privatized, locating a way to finance governmental venture would be required. The Chinese government then implemented a taxation system inclusive of the valueadded tax (VAT), business tax (BT) and a 8 consumption tax (Zhijun, 2013). The BT tax is placed on a number of services inclusive of telecommunications, transportation, communication, postal, financial, and other service industries. The VAT was focused on taxing manufacturing industries, and the consumption tax is placed on any consumables which is 17% of goods. The taxation system that China has put into place provides for over half the revenue needed to support the government (Hejing & Whalley, 2014). Overall, the tax system that was put into place by the 1994 reform, has increased the central government’s revenues to 9% of the GDP (Hejing & Whalley, 2014). Even with the extensive reforms China has implemented, China’s service trade sector has remained at a deficit for decades. In addition, the level of international competitiveness for various service remains low. Potential major impacts lay in terms of economic growth, employment and labor migration, technology diffusion, and FDI pattern for China and the global economy. Each area reflects the increasing global importance of China’s service trade and its competitive impacts on global service delivery. Three potential ways to move a company forward in the future include: (a) increasing China’s service trade development, (B) examine the impact of allowing laborers to migrate inland, and (c) analyze the emerging trend of the outward Foreign Direct Investment (Hejing & Whalley, 2014). By understanding each of the potential ways to expand the economy, China can determine which changes will be the most beneficial. As a world power, China needs to continue to transition to embrace the characteristics and qualities other nations are willing to team up with and trade commercially. By strengthening and empowering the people of China, the country’s government can strengthen overall competitiveness in the global economy. In addition, another way that will help strengthen the 9 financial system is to develop and instate policies that would consolidate the banking systems in China. By providing a command center and consolidating banking systems, China’s financial system can move as one system together rather than in many directions. This concept will allow China’s financial sector making it a force for the world to reckon with (Chen & Chen, 2015). Current Challenges Resulting from China’s Economics China based its export strategy on its ability to provide cheap labor. According to Carbaugh (2013), China’s exports are based upon lowwage manufacturing, exporting sporting goods, toys, electronics, footwear, garments, textiles, etc. China’s import market is based on the need for machinery that it is currently unable to produce domestically (Carbaugh, 2013). While initially the strategy has worked, this method will not hold out for long. China’s able workforce will continue to shrink within in a few years due to an aging population. If the working population pool decreases, wages will begin to rise. As wages begin to rise, and the workforce decreases, export prices will increase. As export prices increase, other nations will begin to move to other countries to acquire goods at a cheaper price continuing the cycle. While continuing the cycle perpetuates low wages and poor working conditions, those conditions will move to other nations such as Bangladesh (Carbaugh, 2013). For this discussion though, the main focus will be on the challenges resulting from China’s economics within it’s own borders. In order to become a wealthy nation, China must increase its the middle level income status. As it does though, wages are increased, and the effects are seen. Companies are moving their production and manufacturing facilities to other countries to locate cheaper labor (Carbaugh, 2013). Continued growth will require a decrease in stateowned enterprises and substantially enlarge the telecommunication, agriculture, and finance sectors. In addition, wages 10 education and technology will have to continue to increase to realize high levels of GDP growth (Carbaugh, 2013). Another area to focus upon is the disposing of laws that restricts the migration of workers from the farming lands to coastal cities (Carbaugh, 2013). Forbidding progress or limiting freedoms, as the Chinese have found, is not conducive to a progressive society. By opening China’s trade barriers allowing for privatized industry and creativity, China’s people will find ways to sustain economic development. Some of the changes that have already been made were in agriculture and industry were made to increase the role of the producing unit. These changes increased incentives to individuals and providing a reduction of the role of state planners. This process allowed for greater competition and a reduction in stateowned firms. Agricultural production in China is now focused on enlarging grain farms to support its population. In addition, the Chinese government is now incentivizing technological innovations that are built to fit smaller farms (Rada, Wang, & Qin, 2015). Analyze and Evaluate China’s Response to the Global Financial Crisis China’s response along with four other countries known as the BRICs (Brazil, Russia, India, China, & South Africa), succeeded during the time of global financial crisis in 20082009. Globalization is key to forward movement of society as a whole, and by learning effective strategies during turbulent times. “Globalization can be defined as the process of social, political, economic, cultural, and technological integration among countries around the world” (Luthans & Doh, 2012). Dixon (2009) shares the belief that the BRICS countries will overtake the G6 no later than 2040 by manufacturing and exporting goods and services provided by a highly capable workforce. China’s response to the global financial crisis along with the other 11 BRICs nations was to provide a focus upon holding a significant level of reserves. By placing a focus on controlling financials, China is able to ensure that the yuan remains stable while other countries monetary systems are failing. As China focuses on furthering its national savings model, it can continue to maintain it’s momentum (Passeri, 2015). One of China’s additional strategies that kept it from falling into despair as other countries did was to purchase a significant amount of U.S. dollars in order to leverage the yuan. In the very near future, China’s population will become top heavy in age pushing the younger generations to move resources around to support the aging population (Zhan, 2013). Critically evaluate China and Global Economic Rebalancing Global economic rebalancing requires an overhaul of the current system reducing government controls and allowing exports and capital inflows to take place more easily. Global imbalances could arise throughout the process of rebalancing. Without rebalancing the same concept could be true. Improperly implement regulation and providing a distortion to the global marketplace could create a level of chaos, especially with the second largest world market. But if, China works towards reform within the global market, acquiring inputs and redesigning a more flexible system, the new system could be beneficial if designed correctly (Arslan, Kılınç, & Turhan, 2015). By creating and allowing more flexibility into the system, there would be a trade off between inflation and employment. A flexible exchangerate would certainly go a long way in rebalancing China’s economy. As the Chinese reduce savings to further develop the economy, they could still protect their economy from spiking interest rates which could depreciate the yuan. In addition, by reducing the required level of savings required to be placed into each individual’s pension plan, each household would most likely spend more and stimulate the 12 economy. Something that China’s government must take into consideration is the effect that it can cause on the world’s economy. China is a driving force in the world’s economy and any significant changes can cause significant issues. If China’s government makes large, rapid shifts, it not only affects people living within it’s borders, but around the world. Due to the size of the economy, it is in everyone’s best interests to involve the world’s leaders and make decisions in a joint manner. Without coordinating efforts, the effects could be devastating for all parties involved. The same can be said of other nations, inclusive of the U.S. A significant shift in the U.S. marketplace can collapse other economies. The world’s population as a whole should seek to find a balance globally rather than strive to dominate. The end result is a global economy working to achieve a better balance for society as a whole, rather than a better future for one country alone (Arslan et al., 2015). The best way the Chinese government can move forward while rebalancing its own economy and not creating worldwide chaos is to make smaller shifts allowing the global market to shift and adjust at the same time. If we take a look at why the slower shifts should be used, one can review the stock market during period of chaos. When the 9/11 terrorist attacks took place, the stock market plummeted. While this example is one of the most extreme that can be given, the same effects can be shown if a major market suddenly shifts. If large investment banks or institutional investors make large shifts, the ripple effect could not only create a crisis situation in itself. A key strategy that financial planners around the world promote is diversification. The more markets or products invested in, the more stable an investment becomes. This is because one sector is increasing in profitability while another is decreasing. This allows an individual to 13 acquire an average rate of return versus trying for the big win and potentially loosing out in the process. Countries cannot afford to be as volatile with investments. By spreading out the risk among a number of investments, the level of risk becomes much lower. As governments expand into the global marketplace, they need understand this concept and potential impacts prior to making any large shifts (Straetmans, Verschoor, & Wolff, 2008). Overall, the main ideas to take away from this discussion is that rebalancing is not purely monetary, but requires a shift in mindset. Reform needs to include a reduction in surplus savings as well as an implementation of strategizes that will reduce net foreign asset accumulation rates. Overall, both strategies must take place in order to rebalance China’s economy (BénassyQuéré, Carton, & Gauvin, 2013). Conclusion Over the course of the last 50 years, the People’s Republic of China’s government has made significant progress in developing its economy. China now boasts the second largest world market and continues to make significant strides in the global economy. Throughout the last century, China has transitioned from a command economy to a socialist market economy to a marketoriented economy. Each economic state has served a specific purpose within China’s development and by analyzing each period, other governments can learn from the past to refrain from duplicating mistakes in the future. While China did find a level of success and growth duplicating the Soviet Union’s socialist strategy, the downfalls started thereafter. As the government began to control ownership of manufacturing and businesses, the cost of goods started to grow leaving many individuals without jobs and very poor. The ultimate shift took 14 place after the death of 1 Chairman of the Central Committee of the Communist Party of China, Mao Zedong. The Chairman was driven, pushing continuously for more government power and the need to control the people of China. After his death, the shift began and China was able to finally shed its socialist government. By allowing individuals to own businesses again and opening up the market, not only to exports but to foreign investors, the government flourished. As the marketoriented economy moved forward, it experienced 30 years of double digit growth in GDP. After 30 years, the growth rate is beginning so see a decline to a 9.8% annual growth rate. The issue that China now faces is to make further changes to the economy to continue prosperity. The changes will need to reflect increased wage and better conditions for laborers. China’s workforce will require changes as its workforce is aging, are more educated, and no longer willing to work for low wages. By implementing the necessary changes to allow individuals more freedoms to choose, individuals will have a tendency to become more innovative and wiling and able to grow. As nations become global players, and begin to move toward becoming team members in the global market place, one has to wonder at what point the nations will cease to exist as independent countries and beginning to run as one global entity. 15 References Arslan, Y., Kılınç, M., & Turhan, M. İ. (2015). Global imbalances, current account rebalancing and exchange rate adjustments. Journal of Policy Modeling, 37324341. doi:10.1016/ j.jpolmod.2015.02.002 Aoki, M., & Wu, J. (2012). The Chinese Economy: A new transition. New York, NY: Palgrave MacMillan BénassyQuéré, A., Carton, B., & Gauvin, L. (2013). China and global rebalancing: A two country approach. China Economic Review, 26118139. doi:10.1016/j.chieco. 2013.04.005 Carbaugh, R. (2013). International economics. (14th ed.). Florence, KY: Southwestern Chen, K., & Chen, G. (2015). The rise of international financial centers in mainland China. Cities, 47 (Current Research on Cities (CRoC), 1022. doi:10.1016/ j.cities.2014.11.012 Chinese Economic Reform. (n.d.) Retrieved from: https://en.wikipedia.org/wiki/Chinese_ economic_reform Dixon, P. (2009). 24 Emerging markets future trends: BRICS impact on developed world. Retrieved from http://www.globalchange.com/emergingmarketsfuturetrends bricsimpactondevelopedworld.htm Hejing, C., & Whalley, J. (2014). China’s service trade. Journal of Economic Surveys, 28(4), 746774. doi:10.1111/joes.12081 Luthans, F., & Doh, J. (2012). International Management: Culture, Strategy, and Behavior 8th New York, NY McGrawHill Irwin Ogrean, C., & Herciu, M. (2010). Changing the patterns of the global economy – the emergence and evolution of the BRIC countries. Studies in Business & Economics, 5(2), 100110 Passeri, A. (2015). The evolving role of china in the global economy. Asian Studies Review, 39(1), 158159. Retrieved from http://www.tandfonline.com Peng, M. W. (2014). Global Strategy, (3rd ed.). Mason, OH: SouthWestern Rada, N., Wang, C., & Qin, L. (2015). Subsidy or market reform? Rethinking China’s farm consolidation strategy. Food Policy, 5793103. doi:10.1016/j.foodpol.2015.10.002 16 Straetmans, S. M., Verschoor, W. C., & Wolff, C. P. (2008). Extreme US stock market fluctuations in the wake of 9/11. Journal of Applied Econometrics, 23(1), 1742. doi:10.1002/jae.973 Urdinez, F., & Masiero, G. (2015). China and the WTO: Will the market economy status make any difference after 2016?Chinese Economy, 48(2), 155172. doi:10.1080/ 10971475.2015.993228 Yang, C., & Rubin, B.A., (2014). Market transition and the destitution of standard work hours in post socialist Chin Industrial & Labor Relations Review, 67(3), 864890. doi:10.1177/ 0019793914537454 Zhan, H. J. (2013). Population Aging and LongTerm Care in China. Generations, 37(1), 5358 6p Zhijun, L. (2013). VAT replacing business tax: A Major Tax Reform in China. International Tax Journal, 39(2), 1722 Member information; China and the WTO. (2016). Retrieved from: https://www.wto.org/ english/thewto_e/countries_e/china_e.htm
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