Globalization and Business Enterprise - Essay Example

Global Recession and Business Enterprise Introduction: This essay examines how the world recession would afftect the Wellington based ANZ National Bank Ltd, which has signficant presence outside New Zealand. This has been motivated by the fact that global recession of the recent time has been related to sub-prime crisis, which is often characterized as financial crisis. As ANZ National Bank is a constitutent body in the global financial industry, it may be in place to discuss the implicatons of the crisis on ANZ Naitonal Bank. The essay ends with certain concluding remarks. Global recession: some stylized facts According to the latest Wold Economic Outlook published by International Monetary Fund (IMF, 20), the world output (income) grew at the rate of 3 percent in 2008, which declined to -0.6 percent in the very next year. In fact, the decline in the output began from the last quarter of 2008 since when the sub prime crisis surfaced in the US casuing enormous panic amongst the major players in the financial market. The United States witnessed a sharp deterioration in its economic growth from 0.4 percent in 2008 to -2.4 percent in 2009. With signficant stake in the global economy, what has been the source of its ailments had unfortunately transmitted to the rest of the world causing world wide recession. Howeve, the recent reports suggest that the global economy has recovered faster than anticipated, clocking growth rate of 1.7 percent in the last quarter of 2009. It is projected that the growth rate in 2010 will substantially improve to 4.2 percent, with the US is expected to grow at the rate of 3.1 percent during the same period. The decelaration noticed in the global output has been a major worry for both political and eocnomic policy makers across the globe. So much so, concerted efforts were made to ward off the ill-effects, a major point that will be addressed in the latter part of the essay. Coming to the story of New Zealand, the country recorded negative growth of -0.1 percent even in 2008, and with the decline in the global output, its growth rate went down further to -1.6 percent. As it may be noticed in Chart 1, the growth rate of New Land somehow moved in tandem with global output, particularly in the recent years. Thus, any business enterprise located in New Zealand has to worry about their market prospects, depending upon in what direction the global output was moving. More so, these enterprises need to surely bother about the recovery process of global economy too. Source: IMF, 174 Recession and policy response: The above narratives clearly brought out the disquieting trend with respect to world output and national income of New Zealand in particular. This also calls for a clear understanding of recession and what can be done to make quick recovery. As recession is generally understood in terms of decline in output consequetively for two quarters, there is no doubt that tendencies observed in global output since October 2008 till September 2009 points to the fact of global recession. In fact, the recession was triggered by the sub prime crisis in the US that surfaced in October 2008. As the ill effects of the crisis had permeated into other economies, it also points to the globalization of crisis. In the analysis of recent recession, the term globalization had been the buzz word. For economists, globalization means integration of domestic economies with the rest of the world by means of trade and factor mobility. Given the higher degree of integration of the global economies, it is important to examine the context of policy response. The classical theorists like Smith and Ricardo have advocated for a free flow of goods and services. Some believes, in the tradition of Smith, that each country has certain absolute advantage in producing certain commodities and should focus on that. If every country behaves this way, production and consumption possibility facing each country widens. And so, world welfare increases as a result of international trade. Some others believer, in the tradition of Ricardo, that each country had a comparative advantage in producing certain commodities in terms of productivity and gained by trading on this commodity; and the country had to import those commodities in which it did not have comparative advantage. Policy that enhances increased flow of goods based on comparative advantage results in increase in world welfare. There are also arguments focusing upon factor endowments. This school believes that very economy faces a situation, that is, they have some factors of production abundantly available, whereas some others are scarce. They reasoned that abundant factors would therefore be relatively cheap, scarce factors would be relatively dear in each country. Thus, a country should produce commodities requiring for their production much of abundant factors of production and little of scarce factors, and exchange the same for goods that uses more proportion of scarce factors for production. The outcome is that each country indirectly exports factors in abundant supply and imports factors in scanty supply. There was a consensus among them that international trade promoted world welfare and should be encouraged. However, there are undermining forces that impair such flow. These forces are more often than not is purposive depending upon the economic policy of a domestic economy. If the government of a domestic economy wants to protect its own industries from goods produced by companies in other countries, it may erect various trade barriers of tariff and non-tariff in nature. Whatever, there is a tendency to protect domestic companies, which amounts to giving protection for these companies from competition. To realize the full gain of international trade, as pointed by the theorists, it requires some degree of surrogating national policy to global policy. On the other hand, the proponents of protection argue that the international trade takes place on an unequal ground due to historical reasons and thus some degree of protection has to be offered for domestic producers. In the absence of this, there would be dependency created on other countries, which would reduce the domestic growth. For these varied reasons, protections of some forms were in vogue for a very long time, which circumvented operations of market forces. Tariff is used to grant protection for domestic economies. It is a tax imposed on good or service, when they are imported into a country and usually collected by customs officials at the place of entry. There is an economic effect of tariff. Consumer surplus is the increase in economic well being of consumers who are able to buy the product at market price lower than the highest price that they are willing and able to pay for the product. Whereas producers surplus is the increase in economic well being of producers who are able to sell the product at market price higher than the lowest price that would have drawn out their supply. Once tariff is imposed, it is potent to reduce both producers’ surplus and consumer’s surplus. Because tariff increases domestic prices above the world prices, consumers reduce their consumption, and it encourages production of goods in the home that could be purchased more cheaply abroad. The resources are transferred to the production of these goods from their best alternatives uses and hence there is inefficiency. These two together constitute ‘efficiency loss’. When a tariff is levied, it lowers foreign export prices and there is some income getting redistributed from the foreign country, which is popularly known as terms of trade effect. There is a consensus amongst policy makers across the globe that mobility of goods and services, and capital, should be unrestricted. So much so they have been advocating free trade. Given that each economies are in different stage of development, their respective policy makers tend to take position that is inimical to international trade. Though tariff may not be desirable from the point view of economic welfare, it continues to be a major medium of protecting domestic production. In order to ensure smooth flow of goods global agencies such as World Trade Organization (WTO) attempts to harmonize the rules. While countries like New Zealand had benefitted a lot by being a member of WTO, still it faces barriers to trade, particular from its trading parterns like the US. It may not affect ANZ National Bank directly as its trading interest is not much. However, trade is facilitated by banking system across the globe, and being one of the leading MNC bank in the global areana, the interst of ANZ National Bank is affected. For instance, in line with the consensus amongst policy makers on the need for providing fiscal stimulus, the US government announced fiscal stimulus package amounting to US$ 785 billion in January 2009. At the same time, they made several attempts to reduce import by whatever manner possible in order to boost their domestic production. In fact, the US provided lead to the world by announcing Buy America clause for all the beneficiaries of its stimulus package. The real issue in the recovery process was the kind of protectionism practices followed by different countries to ensure that their companies do not suffer from import competition. The insertion of Buy America clause in the stimilus package is not the traditional tarrif trade barrier (Sawyer and Sprinkle, 38) but it is an administered protectionist policy. Since its major trading parters had protected, the US government went slow on in protecting domestic firms and this is likely to improve world trade. Side by side, the US administration has also announced several norms with respect to banking system to safegaurd financial system. It is likely that such initiatives would be emulated by several other countries and hence the regulatory environment would change across the globe. Concluding remarks: As reported by Internatioal Monetary Fund (IMF) the global economy is projected to recover and it is certainly a good news for country like New Zealand, whose growth behaves more or like that of world output. In particular, the recovery story should be pleasing the captains of ANZ National Bank; but the team should not ignore the regulatory environment that will come in force world wide in the post great recession. New global strategies of the bank should carefully consider new developments that is likey to emerge soon. References Barro, R.J., and X Salai-i-Martin. Economic Growth. New York: McGraw-Hill. 1995 Daniels, J.D and Radebaugh, L.H International Business: Environment and Business. Massachusetts: Addison Wesley Longman Inc. 1998. Dornbusch. R and Fischer. S. Macro Economics. New York: McGraw Hill Inc. 1994. International Monetary Fund. World Economic Outlook. Washington: IMF. 2010. Krugman, P.R, and Obstfeld, M. International Economics Theory and Policy (6th edn).New Jersey: Pearson Education Inc. 2003 Sawyer, W.C and Sprinkle, R.L. International Economics. New Jersey: Pearson Education Inc. 2003. Read More