Economies and Factors That Affect Their Financial Development - Example

Economies and factors that affect their financial development Contents Contents 2 Introduction: 3 Literature Review: 3 Critical Analysis: 8 Conclusion: 14 Bibliography 16 Appendixes: 18 Introduction: Economy also referred to as an economic system is whereby individuals are involved in the trade, consumption and distribution of goods that are deemed scarce in a certain geographical locality. Those involved in economic activities include businesses, individual persons, firms or organizations and governments of countries. All these happen when there is an agreement assesses the value of what is to be transacted in terms of a certain currency. This essay will look at economy with regards to countries or nations. This essay will look at two economies, those of China and Haiti, and will compare them along the most meaningful dimensions of financial development such as financial depth and or access to finance. An explanation will be sought as to why one of the chosen two economies has a higher level of financial development as opposes to the other. Literature Review: Xiamen (2014) explains that for countries to experience economic development, they must put in place an efficient economic system. This includes a functioning central bank and financial regulation and supervision. Xiamen (2014) gives an example of China, which began its road to industrialization in the 1970s, during the leadership of Deng Xiaoping. Deng began reforming the Chinese economy after realizing that it was lagging behind, its South East Asian neighbors such as Singapore, Malaysia, Japan and South Korea. Mr. Deng introduced policies and measures aimed at making the Chinese economy to grow, and an example includes liberalization of the Chinese economy, and decentralization of government policies (Xiamen, 2014). These policies have contributed greatly to the growth of the Chinese economy, into an industrial and economic giant. Fairbank & Goldman (2006) compares China to Haiti. Fairbank & Goldman (2006) explain that the economy of Haiti, as compared to the economy of China, is very low. This is majorly because of poor leadership, and weak institutions of governance (Fairbank & Goldman, 2006). Fairbank & Goldman (2006) explains that because of the economic programs initiated by President Deng, China has managed to be second largest economy in the world. This is despite mixing the socialists ideology, with the free market economy. Xiamen (2014) explains the power of the Yuan currency. Xiamen (2014) explains that it is the strongest in terms of the purchasing power of the world. Buckman (2014) managed to study the Chinese economy for the last 30 years. This is with the growth rate of 10% per annum. This was one of the highest growth rates in the world. China leads globally in terms of manufacture of goods and also their export. It also tops in terms of having the fastest growing consumer market, ranking second with regards to importing goods (Aoki & Wu, 2012). The country being the largest trading country in the world is crucial to international trade, a fact that made it become a member of the World Trade Organization in 2001. The country has signed other trade treaties to facilitate its economic activities. Examples include the China- Australia China Free Trade, ASEAN-China Free Trade Area, and the China- South Korea Free Trade Agreement among others (Aoki & Wu, 2012). The International Monetary Fund (IMF) in 2014 ranked China number 77 based on the per capita income and nominal GDP. China depends on its coastal regions which are more industrialized as opposed on the hinterland with less development to propel its booming economy (Fairbank & Goldman, 2006). Aoki & Wu (2012) in their analysis of the KPMG report documents, they explain that the infrastructure development of China has been the highest in the world. This is after in 1980, the county came up with special economic zones that ensured spread of economic development to the rest of the country (Aoki & Wu, 2012). In their analysis of the economy of China, Heine & Thompson (2011) talks about the Chinese manufacturing industry, and its agricultural sector. They explain that the Chinese manufacturing sector comprises of chemical fertilizers, iron ore, telecommunication gadgets, electronics, foot wears, satellites, etc. They explain that the agricultural industry is the highest employer, employing approximately 36.7% of the Chinese labor force (Heine & Thompson, 2011). This is closely followed by the services industry, and the manufacturing industry, which stands at 34.6% and 28.7% respectively. This means that the Chinese economy is heavily diversified, and does not rely on one product. This is as opposed to Haiti that heavily relies on agriculture as a major source of income for majority of its population. The country exports among other goods data processing equipment, clothes, iron and steel, medical equipment to countries to among other countries the United States, Hong Kong and Japan, the country’s main export partners. On the other hand the country imports oil and mineral fuels, chemicals that are organic, medical tools, electrical machines from countries such as South Korea, Japan, Germany, Australia, United States and Taiwan (Aoki & Wu, 2012). As of the year 2013, the country’s gross external debt stood at $863.2 billion while revenues and expenses stood at $2.118 trillion and $2.292 respectively. In 2014, the country’s foreign reserves stood at $3.89 trillion while inflation was at 2.0 per cent (Xiamen, 2014). Coupeau (2008) explains that unlike China, Haiti is a poor country. This is in terms of its GDP per capita. The county is faced with serious cases of corruption, low levels of education and poverty makes the country struggle towards lifting its economic status from the poor state it is in. This is despite the low labour costs and tariff free access for its exports to the United States (Coupeau, 2008). In 2007, the county which has a labour force of 4.81 million people was ranked 157 based on its capita. In 2013, it had a GDP of $13.42 billion making it among the smallest economies in the world (Buckman, 2014). The country’s population below the poverty line stands at 69 per cent. Unemployment is at 39.5 per cent which puts a strain on its already struggling economy (Buckman, 2014). It relies heavily on industries such as refining of sugar, manufacturing cement, small assemblies that rely heavily on imported parts, milling of flour and making of textiles (Heine & Thompson, 2011). In 2013 the country’s exports stood at $ 876.8 million and included export of oils, agricultural products such as cocoa, coffee and mangoes. Apparels also do feature in the country’s export list. Most of the goods are exported to the United States which happens to be the small nation’s main export partner. The Haitian gourde is the nation’s currency. Imports which include goods that have been manufactured, machines and equipment used for transport, raw materials and fuels and food products stood at $2.697 as per the 2013 statistics. The imports come mainly from Dominican Republic, China, Netherlands and the United States. Total revenues according to 2013 statistics stood at $1.989 billion while expenses were $2.437 billion (Buckman, 2014). Due to its small economy, Haiti relies heavily on foreign aid which stands at $600.The county’s inflation is at 6.3 per cent and this is as per the 2013 statistics. Haitians, about two fifths, rely on the agriculture industry dwelling more on subsistence farming. This puts the county at the mercy of natural calamities such as earthquakes that have affected not only farming but other commercial activities (Fairbank & Goldman, 2006). Also the nation has high levels of deforestation. Lack of investment has made it to have the highest inflation rate compared to other low income countries in the world. This is why it relies on donor aid to run its economy. For example in 2006, the country held a donors’ conference whereby aid promised exceeded expectations. Foreign exchange is hinged on remittances and account for close to 20 percent of the country’s GDP. In his bid of explaining the reasons of the poor performance of the economy of Haiti, Coupeau (2008) examines the impact of the 2010 earthquake in the country. The county’s economy suffered severely in 2010 after a 7.0 magnitude earthquake ravaged it. It destroyed Port-au-Prince, the country’s capital city and also its economic hub. The result was losses amounting to $7.8 billion. The situation was worsened by the fact that 80 per cent of the population was already living in poverty (Aoki & Wu, 2012). The earthquake caused economy to contract by 5.4 per cent. However, donor aid has seen the situation improve gradually. The United States assisted in the recovery efforts by boosting its trade with the nation. An example was its increase of apparel exports through the Partnership Encouragement (HOPE). Critical Analysis: There are numerous factors as two why some countries have higher financial development compared to other. In the case of China and Haiti whereby one economy is large and the other small a comparison can be made (Buckman, 2014). Some countries have a more effective central bank that plays a crucial role in regulating and supervising financial development in their countries as opposed to others. It has been proved that creditor rights that are robust and a huge proportion of freedoms related to the economy play a huge role in ensuring financial development. It is based on these facts that China has managed to be an industrialized and rich country, when compared to Haiti (Coupeau, 2008). For instance, it is very easy to access capital in China. This is because of its banking system that is highly developed, with adequate funds that can enable the citizens of the country to acquire capital. For instance, the introduction of the economic stimulus package in 2008, by the Chinese government played a role in encouraging the Chinese people to take loans, and access capital that could be used for purposes of expanding their enterprises (Buckman, 2014). This money was approximately 586 billion US dollars, and it was the intention of the Chinese government to use it, for purposes of eliminating loan quotas, and ceilings imposed by the banks, for people seeking capital from banking institutions. This money was also advanced to banking institutions so that it could give them the capability of financing high priority business initiatives, such as development programs in rural areas, and the financing of small business enterprises in China (Coupeau, 2008). This is unlike Haiti, whose banking systems are not well developed, and the government does not have economic stimulus programs, that target the financial and banking industry. Because of a high rate of poverty, it is difficult for people to borrow money, because banking institutions are reluctant to offer credit to individuals who cannot pay. Furthermore, the banking system in Haiti is poor, and weak, despite the numerous efforts by the Haiti government to create a vibrant banking system. An example is in 2000, when President Aristide initiated a cooperative plan, whose intention was to promote the development of cooperatives, and the borrowing culture in Haiti. This plan collapsed, leading to a loss of approximately 2000, million dollars. China has a labour force of 787.6 million compared to Haiti’s 4.81 million. The size of labour force is crucial for any country’s financial development. This is because it is labour force, be it skilled or unskilled, which runs industries (Coupeau, 2008). The size of the labour force is usually attributed to the country’s overall population. China’s population currently stands at 1.4 billion people compared to Haiti’s which is slightly above 10 million. Large labor force means that a country can effectively involve itself in all spheres of the economy. For example, part of the population can take on farming, others the service industry, others the manufacturing industry while other people can simply indulge themselves in international trade. This can be done without putting a strain on the labour force (Buckman, 2014). Some countries have lagged behind economically due to political instability facing them. Haiti has experienced political turbulence in its history than most of other low income nations. For example, Baby Doc considered being a dictator just like his father Francois Duvalier was in 1983 forced to flee Haiti escorted by a United States Air force jet after facing rebellion from the people. Jean-Bertrand Aristide took over the country’s leadership in 1990 only to be overthrown in less than a year (Aoki & Wu, 2012). This was followed by civil violence whereby many people were killed. The situation has not changed and the county recently broke into turmoil after contested elections. This instability has scared investor confidence meaning that no one risks doing business in the country. This is contrary to China which under communist rule has witnessed relative calm over the years. It is for this reason that local companies and multinationals such as Apple Corporation, Toyota and Mercedes Benz among others have invested in the country. The development of China is attributed by the policies it developed for purposes of facilitating financial development. For example, in 1978 put aside its policy of state control in all spheres of the economy. In its place the country came up with measures meant on reforming the economy (Lin, 2012). It did so by motivating people to form rural and private businesses, liberalizing foreign business and investment, giving business people some control over their commodity prices, and making investments in industrial production and ensuring that the country had a well educated workforce (Wang & Hu, 2001). The results of these reforms saw economic growth rise in the country of about 13 per cent in 1979. It is good to note that the per capita income quadrupled in the following years, a trend that has made some analysts predict that China’s economy will overtake that of the United States in the coming 20 years. A research done by the IMF to find out why China’s economy is booming attributed this to capital accumulation in terms of the growth of the nation’s capital assets such as development of new factories and the increase of the labour force that has ensured sustained financial growth (Coupeau, 2008). With regards to financial development, countries that posses that posses a huge variety of capabilities is poised to record the highest financial development. This is with regards to goods and services offered (Heshmati, 2006). China which started off as a nation that manufactures garments went on to move into the production of cars, machines used in hospitals and electronics which are sold globally including television sets, mobile phones and radios (Buckman, 2014). This is unlike a county like Albania or Haiti which have stuck to traditional industries that include garment making. It is evident that technological advancement is embraced globally and as such consumers and investors tend to take a special interest in modern gadgets such as mentioned above (Coombs, 2001). Sales are bound to be high for such items leading to financial development for countries that are involved in their manufacture. Also huge populations for some countries imply a huge local market pool. China with its population of over a billion people offers ready market for its products be it from the agriculture sector, the service industry or manufacturing industry. This is because locally produced goods are considered to be cheaper as they are not subjected to among other excise tariffs or imports tax. This makes them appealing to the local market (Aoki & Wu, 2012). It is therefore common to find Chinese cars, electronics, medical equipment or even space exploration machines and satellites being used by locals. This local market boosts sales for companies and contributes to financial development. In addition foreign firms tend to invest in countries whereby there is a huge market for its products (Coupeau, 2008). Examples include the Toyota and Apple Corporations that have huge investments in China. Such is not likely to happen in a country such as Haiti with just over 10 million people. The local market here is regarded to be small and the fact that 80 percent of the people are below the poverty line makes matters worse. Also the geographical location of countries makes it easily accessible for traders whether local or those dealing in international trade (Guo, 2012). China like many other developed countries has harbours that are not only accessible but can accommodate huge trade ships from the rest of the world. In addition, the country’s infrastructure especially in the special economic zones set up by the government is in good condition (Buckman, 2014). This is with regards to roads, railway lines, airports, telecommunication networks. These are all requirements for successful trade. Investors tend to operate in countries whereby infrastructure is good enough to facilitate trade. On the other hand, small income economies such as Haiti do struggle to attract investors as their infrastructures are usually in a poor state (Nafziger & Nafziger, 2005). Investors are known to inject money into the economy and hence their absence means that the country will experience limited financial growth (Susman, 2007). Other countries have specialized on one industry as opposed to operating many. Examples are cases in the Middle East for example Saudi Arabia, United Arab Emirates and Qatar which have focused on mining petroleum (Dunning & Lundan, 2008). The above three rank among the countries with most developed economies globally. Specialization allows a degree of innovation and research to better the already existing industry or goods. Some countries have experienced financial development due to their political standing globally as opposed to others. Countries like China, United States, Russia, France and United Kingdom hold veto powers at the United Nations Security Council (Chai & Roy, 2006). This means that they can influence policy that may have an impact on the rest of the United Nations members. In addition to this, China has been known to block measures on countries such as Iran and Syria which it sees as impact negatively its trade (Jaramillo, Sancak & Jaramillo, 2007). This is evidenced by the recent vetoing by Russia of key measures meant on addressing the civil war. By doing this, Syria and Iran has continued to be the preferred choice for trading partners by the two countries regarded as pariah states by the rest of the world. The same has happened in South Sudan whereby China sells among other items weapons and machinery to use for oil drilling (Buckman, 2014). This has ensured that China just like other industrialized countries continue to have a market for their products and in return lead to financial development of their economies. Other countries have invested heavily in local industries to the extent that majority of its products come from local sources. This measure ensures that locals are employed in huge numbers be it in the formal or informal sector. With a local population whose huge population is employed, poverty levels are bound to be low. This in turn encourages local investments as opposed to foreign investments. This ensures that money circulates within the local economies and none is remitted to other countries. A country like China has invested heavily in its local industries and that is why its poverty levels are lower compared to Haiti’s which relies heavily on local investment (Cai, 2010). This further complicates their development agenda as multinationals which operate in the country tend to take a huge percentage of its income into their countries of origin (Gibbons, 1999). Thus local investments motivate financial development for countries. Finally countries that have well established social structure tend to experience a rise in financial development. Factors attributed to this include having a proper health and education system whereby the workforce is not only well educated but has easy access to proper health. In addition, there needs to be a well laid retirement plan and other benefits such as pension to motivate the workforce (Yueh, 2010). Industrialized countries such as China though haven’t achieved this completely is in a better place as compared to Haiti (Aoki & Wu, 2012). The workforce works well when they are well taken care of by their employer be it the public or private sector. This in turn leads to financial development as all sectors of the economy are experiencing growth. It is estimated that 54 per cent of Haiti’s population lives in abject poverty, a fact that puts a strain on the country’s growth and economic development (Naughton, 2007). Conclusion: China is one of the leading economies in the world, and it is the number two economy, after the economy of United States. Haiti is a poor country, with poor standards of living. Haiti is characterized by high standards of living, corruption, a high level of unemployment, and poor governance. Haiti has also been ruled by dictators, who managed to mismanage its economy, making it very poor. Furthermore, because of poor infrastructure, such as the existence of roads, telecommunication networks, it has been difficult for Haiti to attract foreign investments, which is crucial for any country to develop. Haiti further relies on agriculture, as the main source of its GDP. This is unfortunate, mainly because countries which rely on agriculture are unable to efficiently achieve a high sense of growth, or economic development. China on the other hand managed to diversify its economy. China has a robust service sector, manufacturing sector, and a well developed and thriving agricultural sector. Furthermore, because of its population, China has managed to attract a lot of multinational companies, who are attracted to the country, because of a large market for their products. It also has a well developed infrastructure in terms of roads, and telecommunication networks, hence managing to achieve a high level of economic growth and development. Bibliography AOKI, M., & WU, J. (2012). The Chinese economy: a new transition. International Economic AssociationConference Volumes. 150-. Houndmills, Basingstoke, Hampshire, Palgrave Macmillan. BUCKMAN, R. T. (2014). Latin America. Lanham, Md, Stryker Post Publications/Rowman & Littlefield Publishers. Top of Form CAI, F. (2010). Transforming the Chinese economy. Leiden, Brill. CHAI, J. C. H., & ROY, K. C. (2006). Economic Reform in China and India Development Experience in a Comparative Perspective. Cheltenham, Edward Elgar Pub. Top of Form COUPEAU, S. (2008). The history of Haiti. Westport, Conn, Greenwood Press. Top of Form COOMBS, G. (2001). Essays on regional economic development. Rundle Mall, SA, Australia, South Australia Centre for Economic Studies in association with Wakefield Press. 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Bottom of Form Appendixes: Appendix One: China This is a South East Asian nation, which is considered as the second largest economy in the world. Appendix Two: Haiti This is a Latin American country, and it is considered as one of the poorest in the world. Appendix Three: Economic Development This refers to the rate in which the economy of a country is able to grow. It is always measured in terms of GDP. Appendix Four: Toyota A Japanese multinational company that has invested in China Appendix Five: Apple Inc A multinational company that has interests in the Chinese market. Bottom of Form Read More