Impact upon the World Economy of China's Rise - Essay Example

IMPACT(S) UPON THE WORLD ECONOMY OF THE RISE OF THE IMPORTANCE OF CHINA due IMPACT(S) UPON THE WORLD ECONOMYOF THE RISE OF THE IMPORTANCE OF CHINA China has emerged as one of the fastest growing economy; Shifting swiftly from an underdeveloped country to a middle level economy and threatening to overtake the world’s super economies, USA included, in the next few decades. As matter of fact, the GDP figures provided by the IMF cite China as the world’s largest economy, despite some scholars doubting Chinese economic data provided. The outstanding growth of China’s economy can be viewed as having a mixed effect on the entire world’s economy. On the very first hand, Chinese economy boosts the economic growth of not only developing countries but also developed countries enhancing both industrial growth and social welfare improvement. On the other hand, economic growth is always accompanied with military power advancement (Perkins 2009). China invests highly in military power and therefore makes future security levels unpredictable since no one is sure of how the nation will use its power if by any chance it happens to be the world’s most powerful nations. Therefore, since China’s growth is progressive and promising, the rest of the world ought to be ready for the expected advanced impact. Export of both products and labour as well as foreign direct investments makes the greatest percentage of Chinese GDP growth. The implication is that China’s economy greatly depends on its relation with other economies. To China, the overdependence on exports pose minimal threat if any, given that China does not only enjoy competitive advantage over other economies but also has a government policy that supports foreign relations. Notably, China’s initial economic bump up recorded in early 1970’s was attributed to internal factors with negligible dependence on exports. As matter o fact, this initial economic growth resulted from increase in domestic consumption and government expenditure (Zhu & Kotz 2010). China is densely populated and thus provides a reliable market for its manufacturing products. Notably, the increased domestic consumption resulted from a transformation of Chinese economy from agricultural nation to an industrial economy, but maintained a somehow closed economy. By then, China’s growth had little or no economic impact on the global economy. The rapid growth in GDP provoked an urge for extra market and hence led to the incorporation of ‘market reform’ policy in 1978 (Zhu & Kotz 2010). This policy saw China enter the global market in search for market of their excess production. China might not be well endowed with capital, as compared to other developed nations such US, but its population provides adequate labour to sustain its high productivity. Remarkably, increased productivity and endurance in industrial production is the key to China’s success story. The high population is a permanent resource while China’s sustained education system provides adequate skills to maintain its productivity. For that reason, China has not only maintained a steady growth and considerably noticeable share of the global market but also expected to dominate the global market in the near future. At the onset of the 21st century, China’s exports have shown a bump up, though they were slightly affected by the 2008 global crisis (see appendix 1). The increase in exports directly impacted on GDP since China kept their imports as low as possible, making net exports positive and increasing at an increasing rate. As matter of fact, China has the tendency of importing inputs which are of less value and exporting high valued output. Proponents of free trade suggest that, a market can only be at equilibrium in a competitive environment. In these case individuals purchase from the lowest price offer, given a constant level of quality. On the other hand, firms operate at zero economic profits, taking prices as given and those not able to maintain the required level of quality at the given prices quit. Current reports suggest that China satisfies at least 10% of the global market demand, a proportion marked as the largest. To sustain this, China keeps its production costs as low as possible beating its competitors. For instance, USA imports from China are more than twice the former’s exports to China; despite USA possess more innovation and inventions than the latter. The implication here is that, even the most innovative economies are not able to sustain own domestic demand. China takes this as an advantage and strives towards maintaining constant supply of up to date products with the existing technology. For that reason, the impact of any policy or even shock in China’s economy appears to have a higher impact on the world’s economy as compared to other nations. China is well integrated to the world’s economy and hence the above mentioned impact. Its exports are not only targeted to the developed nations but also smaller economies. As matter of fact, China is marked as the most successful exporter to the African and Asian nations, who enjoy the benefit of cheaply manufactured products that translate to lower costs. Notably, these developing countries tend to over-rely on Chinese products, mostly due to lack of close substitutes at the same price. Moreover, the government has adversely reduced living expenses in China by providing most of the necessities. Transport, education and health in China is either maintained purely by the government or subsidised. The result is that employees are able to sustain their lives with low wages and thus find no reason to bargain or higher wages. As a result, labour intensive industries prosper in China posing an intensive competition to advanced economies where labour is relatively expensive. In a precise manner, it can be noted that China enjoys some monopoly power in production of products that require low capital- labour ratio. Given that the existence of many products of that type, China’s impact on the world’s economy remains unquestionable. Secondly, the integration of China in the world economy promoted the decoupling effect and hence reduced impact of advanced economies’ shocks to the global economy. Gone are the days when the shock of the dollar was equally felt by both developed and emerging economies. Note that the impact of the shock is directly dependent on the dependence an economy has on the affected economy. Business cycles are real and thus recession and booms ought to exist consequently. The difference in timing of these business cycles advances the impact. For instance a boom session in the receiving end creates excess demand and may be frustrated by an exporter’s recession, whose output levels are low. This situation has been evident with the US and Euro zone business cycles which rarely concur. China’s emergence comes to the rescue of the above discussed situation. In congruence with the decoupling hypothesis, China fills the gap caused by the difference in business cycles. It provides room for the US and Euro zone to synchronise their business cycles as well as reducing protectionism (Dreger & Zhang 2011). With a constant supply and demand which is less prone to shocks, China provides both market and supply of products reducing the overdependence of any advanced economies. However, the synchronisation comes with a disadvantage of shifting the over-reliance from the original advanced economies to China. China does not only export products but also workers as well as being involved in foreign directly investments. The implication is that, in case China experiences a great depression, the global economy ought to feel the shock. The 2007-08 crises could have been a good example. The euro zone and US experienced a great depression that was supposed to impact the whole global economy. China felt the impact but the government acted swiftly to curb the situation. The result was that the depression only affected the advanced economies posing minimal effects on emerging nations. As matter of fact, China proved that its GDP growth though dependent on the global economy, can be controlled internally. To sustain its GDP growth, the Chinese government launched a fiscal stimulus package that saw China’s GDP grow by 3.1% in 2009, despite previous year’s economic draught. The government focused on investment and government expenditure as the main drivers of output growth. The package therefore included improvement of infrastructure that is roads and rail as well as airport (Dreger & Zhang 2011). The spill over effect was that the general welfare of Chinese citizens improved significantly. In addition, the package included construction of affordable accommodation, Improvement of healthcare and education using government funds another plus to social welfare. These increased government expenditure positively boosted China’s output. The increased output increased the demand for capital and hence China’s investment increased. Consequently, the quality of life in China improved as the cost of living reduced. As other nations were struggling via debt to recover from the recession, China’s fiscal package sustained its GDP growth in addition to maintaining labour costs lower than other economies. It’s worth noting that the fiscal package boosted investment in numerous ways. To start with, the reduced cost of living reduced the urge for increased wages hence cheap labour. Secondly the government provision of social amenities reduces precautionary savings. Hence, Chinese citizens’ consumption increased significantly forming a back up market in case the global market fails. On the other hand, China encouraged its banks to provide capital to investors. Capital and labour to Chinese firms. The availability of cheap labour and capital to Chinese firms since the 2008 crisis has given China an advantage over its competitors (Dreger & Zhang 2011). Given that a considerable fraction of Chinese investments are made on emerging nations, their effort to reduce the impact of the 2008 shock increased their reputation and hence retained good relations with the developing nations. In a nutshell, China is aware of its impact in the global economy and strives at maintaining its stand despite global economy retardations. Though, quite a good percentage of the China’s GDP growth depends on the foreign market, the government is always ready with backup plan to sustain it. Therefore, the fact that China curbed the euro zone crisis effect on other economies signifies a great influence that no other nation has ever shown. Debt financing has always been termed as temporary and thus it’s expected that China might lose its growth rate in the new future (Miles, Scott and Breedon, 2012). However, the practical environment suggests that the global market has a return on capital relatively higher than the Chinese interest rate. With emerging nations seriously supporting Chinese investment schemes by supplying market both to capital and financial goods; the long term expected failure form debt financing might not turn out. Instead China’s investments are expected to remain as profitable as today in the next decades. The only limitation facing Chinese firms is lack of innovation and creation of new technologies. Berger and Martin (2011) point out that if China was as innovative as the US, then none of the economies would compare to it. Although India is expected to overtake China and USA in the next century, the current rate of China’s incorporation of the existing technology into production of quality and low cost production still puts some doubt on that hypothesis. The bottom line is that, invention of new technology comes with an extra expense and hence new technology products are relatively expensive. A high percentage of the global market consumers comprise middle class and developing nations, which cannot afford new technological invention. Therefore, the progress of China might not need invention but rather well utilisation of the already existing technology. Politics and economic progress are highly integrated. The political and social arena of China has been fully globalised and ready to exist in the always changing global market. The noticeable changes in the living norms and social grounds as well as inclusion of western ceremonies in China proves that in the near future China will not only impact the global market but be fully art and parcel of the globalised world. China has always been a communist community emphasising Confucianism as the major tradition. However in the last few decades, China has been actively involved with major Christian events and more so Christmas. Notably, China is not actively involved in Christian religion but these major events create an unavoidable bump up of demand that no capitalist could let go. In contrary with the communists setting, where Christianity and other religions were banned, China has now accommodated any existing religion. Different to Japanese, Chinese appear to be more social and less conservative. However, Chinese involvement in Christmas celebrations has not been motivated by the Chinese Christian community but rather the demand of Christmas items. Xinhua notes that Chinese products dominate the world’s Christmas celebration. The reason behind is obviously China’s ability to produce high quality goods at a cheaper price as noted earlier. The implication here is that, China has been transformed from a communist community adopting some features of capitalism. Religious lines no longer hinder Chinese business operations and thus Chinese firms ought to operate well under any cultural set up. Adaption of different cultures has been a great weakness for advanced economies, and more so US firms. With this notion, China is expected to reach more and more markets and hence increase its control over the global market. All in all, China’s story of reaping highly from the global market is a success one. A market is composed of buyers and sellers and since China falls as an exporter, it thus views the market as consisting of competitors and customers. The impact to these two economies ought to be different according to Robertson (2012), China’s capture of the global market improves the welfare of manufactured goods importers such as USA while diminishing social welfare of its competitors, Japan is an example. Components of trade flows happen to be the obvious reason for this impact. However, it’s evident that the China’s increase in export has had mixed effects on the global, market as a whole. To the receiving end, third world economy markets have enjoyed Chinese exports and consequently improved their welfare. Note that, to third world nations, the access of cheap Chinese exports substituted imports from other advanced economies and hence reduced their cost of living significantly. Advanced economy importers on the other hand might experience unemployment due to over reliance of Chinese products. Autor et al (2012) denotes that the rise in unemployment rates that occurred in USA during the last decade in 20th century can be attributed to China’s entrance into the US market. As long as China’s labour costs remain relatively lower than USA’s wages, then it’s expected that many USA’s companies might shut down following strict competition and thus unemployment might even intensify in the latter. However, this contradictory effect seems to be offset by the positive contributions that Chinese trade with the US has shown. Moreover, literature on relation between trade and wage suggest negligible correlation as far as US economy is concerned (Robertson 2012). Nevertheless, the growth of Chinese economy is significant and continued growth might see the unemployment effect offsetting the welfare improvement a situation that would result to reduced US impact to the global economy, not only economically but also politically. For that reason, USA is expected to curb the effect earlier by either maintaining lower interest rates or applying any other policy that boosts its investments. In addition to exports, FDI has also facilitated the growth of China’s economy. In its initial developing stages, China encompassed a policy that accommodated FDI’s at a higher rate. It was through this that China developed close and very strong long run relationships with capital intensive economies. To the receiving end FDI have an income boosting effect. To China, access of capital via FDI’s helped them to utilise their excess labour. In line with neoclassical arguments FDI inflow in China promoted manufacturing exports, inflow of managerial skills and know-how as well as technological transfers (Shirouzu, 2015). The impact of exports has already been discussed earlier. Though IMF marks China as the leading economy, its decline effect will be felt more in Africa and other emerging economies as compared to advanced economies. China’s progress can be attributed to its access to African market. Markedly trade between China and Africa has had mutual benefit with both economies showing noticeable progress. Most African economies have raised following advance utilisation of their endowed minerals, where China has financed most of the mining process. The decline of China’s economy may hinder the mining industry and hence pose a shock to these African economies. However, the impact of Chinese shock on these economies would be minimal due to the following factors. First, mining requires high investments and minimal operation costs. Given that the firms are already set, then not mining process will continue as long as the current market demand price offsets marginal variable costs. Secondly the improved African economy comes up with creation of other components of GDP. According to Busse et al, China has changed its perspective on African economy from mining continent to business partners and so has other nations (Busse et al, 2012). Therefore, the mining industries currently pose little impact on these economies’ GDP and thus Chinese shock impact though would be real to them, its impact can easily be controlled. In accordance with the above, it can be concluded that China’s economy highly influences the economy. The tendency of developing economies feel shocks from advanced economies’ fluctuation is real. However, China’s growth makes a mixed impact on the world’s economy. It has positively impacted on advanced economies by embracing income growth via FDI inflows, providing market for both physical and financial products, and most important improving the social welfare of citizens via production of affordable commodities. To the growing economies, China’s investments provide not only employment but also technological transfers among other mentioned benefits. All these benefits boost the recipients economies economic growth but make it prone to China’s economic shock in case of China’s economic downfall. However, many neutralizing factors reduce this impact significantly. Negatively, China’s products are always associated with environmental degradation. Talk of their short lived electronics, high carbon emission industries among many others. Bibliography Autor, David H., David Dorn Gordon H. Hanson (2012) “The China Syndrome: Local Labor Market Effects Of Import Competition In The United States” NBER Working Paper 18054 Bach, D., Newman, A. and Weber, S. (n.d.). ChinaS Impact on the Global Economy: From China Price to China Standard. SSRN Journal. Berger, B. and Martin, R. (2011). The Growth of Chinese Exports: An Examination of the Detailed Trade Data. 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