Introduction
Internationalization, also known as globalization refers to the interdependence and connectivity of markets and businesses in the global arena. However, the terms can also have different meanings with internationalization taking a narrower meaning restricted to international relations that arise due to the immobility of certain factors of production such as land, labour and capital. However, this thematic diary shall tackle globalization which is multifaceted and not restricted to economic relations.
With the growth in information and communication technology (ICT), it has become easier for global trade to take place and now markets are so interconnected such that a depression or poor performance in one country leads to a slump in economies around the world as was recently witnessed in the US recession which affected economies worldwide. This thematic diary looks at globalization and its impact on markets and trade around the world. The reason why this topic was chosen is because of its relevance in economic studies and it’s far reaching effects. Its contribution to the growth of economies such as China’s has also generated much interest among financial analysts.
The most interesting aspect about globalization is the domino-effect that comes with it. A good example as given above is the 2007-2008 recession in the United States. Once the stock markets began tumbling down, there was a similar result in all markets worldwide. The depths of globalization were witnessed as commodity prices began to go up worldwide and companies recorded dips in sales and profit. Eventually, the recession was renamed the Financial Crisis of 2007-2010 to accommodate its global nature.
The domino-effect is just one of the disadvantages of globalization; others include culture erosion, environmental degradation, unfair competition and increase in crime. However, the benefits of globalization far outweigh its negative effects. Thanks to globalization, the entire world has become one big marketplace where one can get any commodity he or she needs and workers can get employment anywhere in the world based on their skills. Globalization has increased world cooperation and has also ensured that there is maintenance of peace. It has also contributed to the continued growth of the world economy with countries like China increasing their trade relations with other countries significantly. The result is that trade has ran smoothly resulting in stronger economies.
Globalization has also come in many different forms. It has been mainly economic but there has also been many other forms such as cultural, informational, political, legal, technical, medical, industrial, and financial. This has resulted in culture change and better ties between nations. According to financial analysts, manufactured goods being traded internationally have increased considerably due to globalization.
While all countries have benefitted from better international trade arising from globalization, China seems to have gained the most. Its economy has revitalized surpassing that of Japan which was previously the world’s second largest economy after the US. Projections show that China has the capacity to surpass the US economy if it maintains its impressive growth rate and finds solutions to the various problems that threaten its growth such as energy.
This thematic diary seeks to use China as an example of the far reaching effects of globalization. It shall analyze the various articles written by financial analysts in several journals and magazines on the country, its economy and the threats that it faces in its economic future. Through this analysis, we shall get an insight into the effects of globalization and its role in international trade. We shall also get to see the challenges that come with rapid economic growth.
Individual Diary Entries
Analysis of Business Week article on China’s economic growth
Gupta, A & Wang, H (2011) China’s Economy at an Inflection Point. Business Week, p.1.
This article written by Anil Gupta, the Chaired Professor of Strategy at Insead, and Haiyan Wang, a managing partner at China India Institute, seeks to analyze China’s five year plan starting from March 14th, 2011. They state that China seems to have hit an inflection point due to an expected snag in its export market. As the Chinese Premier stated while launching the economic plan, Chinese GDP growth is expected to slow down from a 7.5 % growth to 7% in the next five years. While the previous five year plan exceeded expectations by far, the two analysts suggest that China will have problems maintaining the high growth rate. They give five reasons for this;
First, Gupta and Wang point out that there will be a huge decline in export growth. This is because China has had an export growth rate of 20% for the last 10 years, a feat which saw its exports rise from 3.5% in 2000 to about 9% in 2010 which made it the world’s largest exporter. The analysts state that continued growth would mean that China would account for over 25% of the world’s exports by 2020 which is a political impossibility. This means that China should reasonably expect a slump in export growth rate.
The second reason cited by the two analysts is that China will seek to improve its social safety net by improving standards of living for its huge population. These measures such as increased pension and minimum wages will lower the country’s savings and thus act as a dip to GDP growth. Furthermore they find that China’s working population has stopped growing at the same rate as the economic growth and thus demographics will over the next 5 years drag GDP growth.
The third reason is that China as an emerging world leader has dedicated itself to environmental causes and plans to cap pollution by limiting its energy use to 4 billion tons of coal by 2015. To achieve this, the country will have to make massive investments in alternative energy sources such as wind, solar, hydropower and geothermal energy. The country also plans to increase non-fossil fuel consumption to 11% by 2015 up from 8 % in 2010. All these investments will serve to slow down China’s GDP growth as the economy adjusts to accommodate these energy changes.
Fourthly, China plans to redefine itself as a leading innovator and move away from the tag of a low-cost manufacturing country. Changes to this effect would require massive investments in research and development. It plans for these investments to reach 2.5 % by 2015. The fifth reason why China’s economy will slow down is the change in policy to have more foreign direct investment (FDI). While China is currently the 13th source of FDI, the two analysts predict that by 2015, China will be among the top five largest sources of FDI. Lastly, a shift from exports to domestic consumption will see a reduced GDP growth but the analysts see this as a major policy plan that will see China become more attractive to investors.
Gupta and Wang’s article is quite incisive in its understanding of the Chinese economy. They foresee that though growth may slump, a 7% growth is still very large for an economy like China’s. They also predict that China will continue to affect global economy especially as is export growth continues and through FDI. China’s contribution to globalization is thus huge and it is expected to change the future global economic outlook. This article is relevant in articulating China’s strategic plan and the problems that it is likely to encounter.
Analysis of Business Week article
Balfour, F (2009) China’s Economy: Recovery Gains Momentum. Business Week, p.24.
Balfour starts by comparing the rate of economic recovery in the U.S with that of China. He finds that analysts do not doubt that China’s economy has recovered unlike in the US case. This has led to the upward revisions for future growth rates. One such revision that informs Balfour that the Chinese economy is out of the financial crisis is that by JP Morgan Chase’s chief China economist Frank Gong. Gong’s analysis amended his earlier forecast of a 7.2% growth to 7.8% for the year 2009. The reason for the upward revision was that the economy seemed to be doing better than as expected. His (Gong’s) prediction for 2010 was even rosier with a 9% growth projection with a possibility for double digit growth.
Other analysts who have predicted a good year for the Chinese economy include the World Bank which raised its estimate for 2009 to 7.2% up from the previously predicted growth of 6.5%. The Organization for Economic Cooperation and Development (OECD) also predicted an improved GDP growth rate of 7.7% way higher than its previous estimate of 6.3%. Credit Suisse also joined the fray of revised estimates by predicting a 9% growth up from 8%.
Balfour states that what is surprising is the fact that China is being given a high rating against a background of reduced export growth which by 10th July had gone down by 21.4%. However, these revisions have chosen to ignore this fact and peg their estimates on the export growth rate of 7.5% recorded for the month of May as a sign that better times lay ahead. Balfour instead attributes better economic performance to local consumption. The $ 586 billion stimulus package introduced in November of 2008 by the Chinese government is cited as the main reason why domestic consumption has been such a boost.
The improved vehicle sales have been a major contributor to the strong domestic showing. Balfour states that improved vehicle sales are coming from smaller inland cities that did not bear the brunt of the financial crisis unlike the hard hit coastal cities. He also states that the real estate market in China seems to have recovered thus giving a major boost to the Chinese economy. The Chinese stock market also seems to have recovered strongly with the CSI 300 index of the blue chip companies in Shenzhen and Shanghai up by 87%. There also was a resumption of initial public offerings (IPOs) with over 1,000 companies looking to list their shares. All in all Balfour finds 2009 as the year when the Chinese economy recovered fully from the effects of the 2007 financial crisis.
This article from Balfour gives an insight into the performing sectors of the Chinese economy. The depth of his analysis enables us to ascertain the functional parts of the Chinese economy and highlights the key areas that need improvement. Once again, the export market is cited as being a huge indicator of China’s appetite for growth. Its 7.5% growth for the month of May also seems to be the basis of the revised economic estimates. This is an indicator of the positive effects of globalization on the Chinese economy.
Analysis of ‘The Guardian’ article
The Guardian (2009). Editorial: Trouble in the Chinese Economy. Guardian, p.21.
This article is in the form of an editorial from the Guardian’s editors. It looks at the challenges which were facing the Chinese economy in the year 2009. The editor notices that the cause of the Financial Crisis was the undisclosed economic process in the U.S which was vulnerable to collapse as was made evident. This brought more focus on the economic processes of the major players in the global economy such as China. The editor states that China’s economy is not easily understandable since its very nature is disputed.
The article critiques China’s economy as being vague in form since it seems to be centrally directed by its government yet it is marketed as capitalist in nature. The editor finds this ironic since evidence from the 1980’s showed that the government stemmed small-scale enterprises and promoted larger urban enterprises whether they were private or public. Another point of view from the author states that China just like Japan has two economies, one which is efficient and export-minded while the other is archaic and more domestic-oriented.
This article brings out the political weaknesses of the Chinese economy and states that just as the weaknesses in the US economic system almost brought the global economy to a standstill, the Chinese economy is also likely to cause a similar meltdown if allowed to run unchecked. The article though political seems to attribute the growth of the Chinese economy to political processes without giving due regard to the economic changes. However, it is relevant in bringing out the risks that come from globalization of trade.
Analysis of ‘Wall Street Journal’ article
Davis, B (2011) Economist: China No. 1 by 2027 Seems ‘A Certainty’. Wall Street Journal, p. 6.
The article is an analysis of the views of Takatoshi Ito an economist at Tokyo University. Ito is of the opinion that China should surpass the US as the world’s largest economy between the years 2021 to 2027. In his publication in the Asian Economic Policy Review, Ito states that though the Chinese economy seems to be in a slump, China only needs to maintain its current economic growth and the only thing that could stop this feat from being achieved is a slip into a ‘lost decade’ which he terms as very improbable judging from China’s appetite for growth.
Ito’s views are shared by other economists such as Arvind Subramanian who is a reputable economist at the Peterson Institute for International Economics. However, Subramanian seems to think that Ito’s dates are too close and he predicts the year 2030 to be the year China overtakes the US. He states that since China has four times the US population, it only needs a per capita GDP of just one fourth of the U.S’s GDP to catch up. Currently, its per capita GDP is one eleventh of the US GDP.
This article from the Wall Street Journal shows that China has the potential to be the world’s largest economy. Since globalization has opened up the gates for Chinese exports, the country is now able to compete with the US. To improve its per capita GDP, China needs to maintain its export growth while improving domestic consumption. All these shall be determined by China’s appetite for trade.
Analysis of ‘The Economist’ article
The Economist (2011) China’s Economy: Bamboo capitalism. Economist, p.11.
This article from analysts in the “Economist” magazine is an analysis of the structure of the Chinese economic system. The article states that the Chinese government prefers to attribute the success of the economy to the hands of ‘bureaucrats’. However, the analysts disagree stating that the double digit growth witnessed in China is owed to China’s entrepreneurs who have been keen to ensure a bottom up economic system which the analysts term as ‘Bamboo Capitalism’.
The analysts insist that though the Chinese government is to be credited with the infrastructural development which has involved construction of roads, bridges, power plants and facilitating transfer of intellectual property rights, its entrepreneurs have proven to be the backbone of the economy. These analysts find that China’s economy is flawed in the sense that these entrepreneurs seem to be operating outside government control and at times, the law. This is why they have not been well captured in state statistics yet their influence cannot be doubted.
State owned enterprises in China perform lowly as compared to the private firms at rates of 4% and 10% respectively. Registered private businesses grew by over 30% from the year 2000 to 2009. While this may be positive for China, it has been achieved by flouting of laws such as Intellectual Property laws and labour laws leaving the workers open for exploitation. While these infringements have been allowed to run, economists predict that they may be a source of future friction which might erode the gains already made.
These analysts from ‘The Economist’ recommend that China has to clean up its legal system sooner rather than later if its growth is to be maintained. A good legal framework would also mean that China encourages foreign investors who are confidents that their businesses will be protected by the law. This article is very relevant since it exposes some of the challenges that come from China’s economic growth. China needs to clean up its house if it is to continue reaping the benefits of globalization.
Analysis of a Financial Times article
Houser, T (2011) Oil-hungry China needs energy security rethink. Financial Times, p. 17.
Houser states that China’s decision to suspend its plans of building new nuclear facilities has caught analysts by surprise. While the Japanese nuclear crisis may have contributed to this decision, Houser states that China has a bigger energy problem on its hands. China is very vulnerable to disruptions in the oil market and due to its heavy dependence on oil; the current political upheavals in the Middle East are causing Beijing to rethink its energy policy.
Houser predicts that the decision to suspend building of nuclear facilities is just a short term thing that will not change China’s long term energy plans. The country’s oil consumption supposes America and Europe. Nearly half of all of China’s oil comes from the Middle East and North Africa and thus the country is taking a huge hit from the ongoing protests. Houser estimates that China will spend more on oil than it receives from selling goods to America this year.
This energy problem has caused China’s leadership to rethink the country’s energy policy. In its five year strategic plan, China will invest heavily in alternative sources of energy such as wind, solar, hydropower and geothermal energy in a bid to tame its oil ‘addiction’. Already, prices of consumer goods are up by 5% and the government is trying to stem the high inflation rates. This article by Houser brings to the fore the major energy crisis that China is undergoing due to its high growth rate. However, it also shows the contribution that globalization has made to China’s growth since it is now susceptible to political upheavals in other countries.
Conclusion
These articles provide an insight on the level of globalization in the world and how China is a part of it. By highlighting the economic achievements and weaknesses of China’s economic system, we can see how they relate to globalization. China seems to be a wonderful example of the pros and cons of globalization since its growth has come at a time when globalization is at its peak.
References
Balfour, F (2009) China’s Economy: Recovery Gains Momentum. Business Week, p.24.
Davis, B (2011) Economist: China No. 1 by 2027 Seems ‘A Certainty’. Wall Street Journal, p. 6.
Gupta, A & Wang, H (2011) China’s Economy at an Inflection Point. Business Week, p.1.
Houser, T (2011) Oil-hungry China needs energy security rethink. Financial Times, p. 17.
The Economist (2011) China’s Economy: Bamboo capitalism. Economist, p.11.
The Guardian (2009). Editorial: Trouble in the Chinese Economy. Guardian, p.21.