The Changes That Have Taken Place in the Global Economy - Case Study Example

1. Executive Summary Dynamism has been trademark of economy. This dynamism is also associated with uncertainties which are capable of unexpected economic outcome. World has been observing the vagaries of economic shifts and it will be observing many more. However, there are many lessons to be learnt from these global economic changes that keep taking place. The global economy has changed in its foundation as well as in its structure. Moreover, in all probability these changes which have taken place are irreversible in nature. This assignment endeavors to highlight the transformations happened in the arena of global economy in general over a period of last three decades. It will discuss the globalization that has changed the global arena as far as the economic perspective is concerned. Going further the assignment will focus on the impact of these changes from the perspective of Australian bilateral relationship with one of its major economic trade partner in Asia i.e. India and also with one of the minor Asian trade partner i.e. Thailand. 2. Introduction Economist describe the period of last three decades (from oil shock till the recent economic crisis) as a period of great moderation, a period of stability in the economic growth and a period of low volatility. This period is being talked about almost in reflective terms and such phase of high stability with low volatility is hardly expected to return soon. The post-2008 global economy has some parallels with the post oil shock world, which had then talked in reflective terms about the phase of high growth called the golden period post World War II. Within the last three decade or so, there changes in the world economy can be broadly segregated into three distinct dimensions. The first one is the de-coupling of primary product economy from industrial economy. The second one is de-coupling of industrial economy from employment and the last and the most critical one is that the transaction of goods and services is no more the driving force for the world economy. Instead, the movement of capital has taken that place. However, if we further summaries these three changes, it point toward the accelerated globalization in last three decades. It means the changes in economy are mostly linked with globalization in whatever form. The effect on globalization can be traced from many important global backdrops. End of Cold War, two Gulf wars fought, emergence of India and China as leading economies are to name a few among them. Figuratively, the global economy in general has grown almost 300% in real terms from USD 30 million in 1980 to around USD 100 trillion by 2010. And this is translated into an average rate of around 3% a year over these three decades (World Bank, 2010). 3. Remarkable Transformations The most spectacular transformation that has taken place in the global economy during that phase has been the emergence of China (Henry, 2006). China has effectively replaced Japan in the world economic pecking order. In early 90s, Japan along with Tiger economies (early East Asian economies) made up to 12% of the total global economy. However, this is falling continuously since then. On the contrary, China, which was hardly 2% of the global economy in the early 80s has increased its share to around 11% by 2010. Moreover, this trend is on increase and China is likely account for around 17% (on Purchasing Power Parity) of the total global economy by 2015. The table below enumerates few of these remarkable changes and its takeaway for the economists. Table 1: The economical transformations (International Monetary Fund (2010) World Economic Outlook). Evidently, the changes have affected the balance of power in the global economy. Though the global economic growth rate has been steadily maintained, the source of the growth has changed regions. Figuratively, it can be inferred that the car of the world economy has not changed gears but has changed drivers. In the 80s when the OECD and other developed countries accounted for almost 67% of the global annual growth rate of around 3.0%. However now, the developed nations no longer provide the majority of the global economic growth. During later part of the last decade, these high income economies accounted for even less than 25% of the global annual growth rate of 4.0% (World Bank, 2010). Emerging Asian economies like China (Garnaut, 2006) and India are now in the driving seat. Whereas China and India contributed just one tenth of all economic growth in the 1980s, that will increase to almost one half of all growth for the period 2008-2015. The last three decades has experienced not just the acceleration of growth in the East but the deceleration of growth in the West. The chart below shows average annual economic growth worldwide, broken down into different regions. Figure 1: Transformation in economic drivers over the three decades (International Monetary Fund (2010) World Economic Outlook). (Western Offshoots: US, Canada, Australia and New Zealand, Warsaw Pact: Erstwhile Soviet Union countries along with Central & Eastern Europe) 4. The Change Factor: Globalization According to International Monetary Fund (International Monetary Fund, 1997), “Globalization can be defined as a rising economic inter-dependence of nations across the globe through enhancing the volume as well as variety cross-border trade of various goods and services along with widespread diffusion of technology”. While there has been remarkable augmentation in global economic integration during last three decades, changes have been predominantly severe over the last ten years. During this decade, trade grew twice as fast as world output, foreign direct investment thrice as fast and cross-border trade in shares ten times as fast (Economist 1997) . Integration of markets has resulted in expansion of various prospects for the developing and under developed nations. This integration over the period of time has improved the resource allocation and has resulted in increasing the efficiency of operations of various sectors in those nations through induced learning and technology transfer. As such, the growth has been facilitated in these nations through encouraging the competition. However, the developing nations being talked about here are not part of a rational group as such. Rather many countries or economy has grown significantly in these three decades; many other nations have in fact lost their steam for development and have become poorer also. There has been another peculiarity pertaining to the trend of globalization during this period. It is the emergence of electronically associated nations. This electronic networking of nations has augmented the integration of global economy for growth and development (Kobrin, 1998). However, it also started the debate about the implication of development in a post-industrial world (Kobrin, 1997). This argument is about the subject as well as matter of integration which is being talked about. Integration in the 90s and onwards is mostly based on the technological developments in IT and allied services rather than based on commercial trade (Negroponte, 1995). There has also been another aspect of this integration. The uprising of information technology has made the geographical distances absolutely meaningless (Dicken, 1994). As such, it’s evident that globalization has definitely enhanced prospects for global economy in general and developing nations in particular. While it is observed that during last three decades, there have been some increases in relative poverty in few nations. It means that the enhancement in economic prowess of some nations and economic downgrading of some other nations have taken place simultaneously (World Bank, 1997). The past 30 years have seen spectacular enhancement in both uprising and downgrading of these set of economies. As a matter of fact, many developing nations have also become less connected to the network of this global economy over the last decade. A World Bank study revealed that the Transaction/GDP ratio was observed to become lower for 47% nations out of the total sample of 93 economies. The study also revealed that in spite of remarkable increase in the aforesaid ratio, another indicator, FDI/GDP got reduced in case of 33% nations out of the sample studies (World Bank 1996). This clearly depicts the non uniformity in effects of globalization on the economic prosperity of various nations. 5. Indo-Australian Economic Relations The world has gone through various economic changes which have also impacted many bilateral relations among nations. One among them is that between India, which had been in the limelight of the remarkable changes explained above, and Australia which also got more integrated to the global economy. From almost laggards in trading partnership with Australia in 80s, India became its 9th largest trading economy in mid of the last decade. Moreover, by end of the last decade, India became its 6th largest importing nation (ABS Trade Data). The trading relationship has grown in various sectors, of which, Gold, educational services, metal, minerals and ores have dominated Australia’s exports to India (Twine, 2002). As a remarkable trend, the Import growth from India has been steady during most of the period of the last decade, but it grew faster than imports from the rest of the world during the last couple of years of the decade. The importance of this changing Indo-Australian bilateral trade can easily be understood from the fact that the two nations have also undertaken a joint study to explore the possibility of a FTA during the end of the last decade. Over the last three decades, export of Australian goods and services to India has grown with an average annual growth rate of over 10%. However, this growth rate of the Indian import from Australia has been over 30% in the last five years of the last decade. Both Indian and Australian investors have made incredible efforts in seizing whatever opportunities available in the respective marketplaces. This is exemplified from one of the instances that during mid of the last decade, investments made by the Australian investors were more than USD 2 billion, covering sectors like heavy industry, production, telecom and ore processing. Reciprocating this, Indian investors have also aimed towards in Australia’s industrial sector and have utilized their proficiency and know-how in sectors like telecom and agriculture etc, which has seen stunning revolutionary changes in the domestic market of India (Twine, 2002). For an example, one of the leading Indian coal producers, named Gujarat NRE, got listed on the Australia's stock exchange. Going further, In IT sector, leading Indian IT companies like TCS, Infosys and Wipro are now acknowledged as the leading IT companies in the Australia also (NASSCOM (1997). Over the period of last 30 years, India has emerged a preferred economic partner. Australia has recognized India as an emerging economy and has given due importance to India as one of its important trade ally. The majority of commodities imports of India from Australia are accounted by coal, ores & minerals, food grains and wool. The global economic changes over the last three decades have affected bilateral relationship of India and Australia in many ways (Drysdale, 2008). Taking clue from these changes over the period, in early 90s, Australian Government undertook an important initiative to set up the Australia-India Council. The key objective of this council was to broaden the bilateral trade with India. Australian companies as a part of this initiative started taking more interest in grabbing the opportunities of the Indian infrastructure and resources sector, which itself was going through a revolutionary developmental phase accounting for more than USD 50 billion. A sense of urgency can be observed in these initiatives as the Australian companies had recognized the necessity of moving fast with a view of completion from the various companies from North America and Europe. Later, as the development in India was getting broader in magnitude, which encompassed sectors like power, transport, construction equipment and services, the extent of the Indo-Australian bilateral trade also grew so as to take an advantageous position in the competitive market. As a result, many Australian companies started are doing business in India. The initiatives taken by both the nations for tariff rationalization and removal of other obstacle to the trade in Goods have helped them to make the bilateral trade more comprehensive and economically rewarding. This has helped in the promotion and protection of investments in both the nations. Given the importance of the development of this bilateral relationship among these two nations, they had already undertaken a joint feasibility study to look into the possibilities of a free trade agreement (FTA) between India and Australia (Asian Development Bank, 2007). This initiative if realized would provide significant benefits to the trade between both the economies. Australia being a reliable supplier of natural resources has been instrumental in providing raw materials for the fast growing manufacturing sector of India. Both leading economies would further benefit from the proposed FTA. 6. Thai-Australian Economic Relations In 1967 five Southeast Asian nations – Indonesia, Malaysia, Thailand, the Philippines and Singapore jointly signed an affirmation proclaiming the start of the Association of Southeast Asian Nations (ASEAN). The objective of ASEAN was to promote cooperation and security in the region. Thailand has been a vital part in this broad socio-economic structure within which Southeast Asia has experienced remarkable economic and social growth over the past three decades (ASEAN and Australia, 2004). Australia has been one of the pioneering nations with an objective of assisting these growing economies to reduce poverty and accomplish sustainable growth & development in various aspects. Thailand has been one of the key nations in that endeavor. The vigor of the economic relationship between Australia and Thailand, apart from the advantages on ground of their geographic proximity, is in part due to the increasing complementarities of the partnership and the vitality of the economies in the country. It is also because of the two nations’ fortitude to repeatedly evaluate the partnership and execute changes to suit the needs of the two nations. During the 80s, the bilateral economic cooperation started and was mere a new regional alliance (World Bank, 1993). It then gradually accomplished noteworthy consistency at the political level. But it took some time for these two partner nations to achieve vigorous socio-economic linkages. Thailand during that time was not yet the outward looking and dynamic nation. However, Australia, being an important regional economy with proficiency and capability in many of the areas critical to socio-economic growth of Thailand, played a precious role in assisting this process. Australia invested around USD 5 million in various projects undertaken by Government of Thailand in order to fund R&D in food production and agriculture. Thus Australia played a very crucial role in establishing food security in Thailand. This is one of the major reasons which led Australia to become a preferred economic partner of Thailand. By 90s, such investment programs from Australia diversified into other sectors like population studies, educational services, mass media development and many fields of science and technology. By mid 90s, around 15 projects and allied activities started receiving investments and funding from various stakeholders from Australia including the Australian Government. These investments and funding accounted for over USD 90 million (ASEAN and Australia, 2004). During this decade establishment of networks and institutional links in various fields of co-operations remained priority for the bilateral relationship between the two nations. However, the later part of 90s unfurled the East Asian financial crisis which also jolted Thailand (Philippa, 2007). This crisis in 1997, not only saw immense monetary outflow from Thailand as an outcome of currency devaluation, it also witnessed social dislocation of millions of people from Thailand. The co-operation between Australia and Thailand then switched its focus on the contemporary issues which were the outcome of the crisis These areas covered national security, especially related to terrorism and health, and maintenance of democratic establishment which in fact was a daunting challenge not only for Thailand but for many other East Asian nations (Drysdale, 2008). Trade was then recognized by both the economies as an integral part of such socio-political efforts. During, last decade, well-targeted trade-related assistance, which was the main objective of the post crisis bilateral partnership between Australia and Thailand, resulted in considerable success in promotion of R&D in science and technology, especially in food-related areas where Australia had considerable proficiency. In many cases, this bilateral cooperation has been able to engender advantages that far surpassed the technical or commercial benefits (World Bank, 1993). By end of the last decade this bilateral cooperation at the economic and political levels had grown amazingly. Thailand had made remarkable gains in economic growth and social development. Thailand and Australia recognized the tactical and political changes in their relations. Even now both the nations continued to make out the special bilateral tie-up on practical cooperation and mutual benefit. 7. Conclusion The global economy has seen phases during last three decades which includes many ups and downs. The growth which has been observed by the world economy has not been evenly distributed. Rather there has been balance of power taken place on the global platform. Some nations have been proactive and have reaped the benefits of the increased co-operation between the nations as globalization unfolded its arms with an accelerated pace. Australia being an important and one of the leading economies of the world obviously got affected by these changes which took place in the global arena. Its bilateral co-operation with one of its major Asian partner i.e. India also witnessed the effect of the changes in the global economy. However, the relationship has grown stronger with time. Australian bilateral trade with one of its minor Asian ally i.e. Thailand has also seen changes which in fact has witnessed East Asian crisis. This co-operation is however, more of a socio-political one deriving its benefits for mutual economic development. 8. References ABS trade data on DFAT STARS database and ABS catalogue 5368.0. ASEAN and Australia, 2004, 30 years of development cooperation, retrieved from http://www.dcita.gov.au/cca. 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