International recovery (United States & Central European countries)

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Question 1
The ongoing global economic crisis that started in the United States since the late 2008 and soon spread to Europe and other economies around the world will have a far-reaching impact, particularly in the short term and the degree of the long term impacts of the crisis are yet to be identified (Peter 2009). But with the fast reaction of the governments in term of economic policy adjustment and the release of the various economy stimulus packages, at the beginning of this year, it seems that the trend of international recovery is underway, below we will critically discuss the economy recovery of the United States, Central European Countries and the emerging economies.

(a) Critically evaluate the above statement by examining the issues pertaining to international recovery particularly in the United States and in the Central European countries (1500 words).
First of all let us look at some basic economy facts and key indicators before and after the outbreak of the economy crisis in the United States as following.

The United States

 

Figure 1. The United States um-employment rate from 2007 to 2011 (end of August)
Figure 2. The United States industrial production growth from 2007 to 2011 (end of August)

Figure 3. The United States business confidence from 2007 to 2011 (end of August)
Figure 4. The United States GDP growth rate from 2007 to 2011 (end of August)

From the three figures that shows the trend and changes of the um-employment rate, industrial production and business confidence, we can divide this period (from the late of 2007 to present) into three stages:

Stage 1. From late of 2007 to middle of 2008

According to National Bureau of Economic Research (2008), the US economy entered into a recession in December of 2007, this can been seen from the above figures as at the same period, the um-employment rate increased steadily together with the slowdown of the industrial production growth which is considered as the barometer of the US economy. And in this stage, the big economy crisis was still not expected and the US government had not taken major policy changes.

Stage 2. From the late 2008 to the first half of 2009

The global “credit crunch” which saw massive defaults on sub-prime mortgages made to higher-risk borrowers reached a dramatic peak in September 2008 (Chisholm 2010, p.13). And on September 15th, 2008, Lehman Brothers files for bankruptcy protection after the government decline to offer bailout. But when other large large corporations also encountered similar financial problems, the government began the large scale interventions such as lending a USD 85 billion to American International Group (AIG) to avoid bankruptcy (Schlösser 2011, p.63). And soon the Congress authorized the Treasury Department to use up to $700 billion to stabilize financial markets through the Troubled Asset Relief Program. In late November the government announced an $800 billion plan to boost consumer credit and the market for mortgage-related securities (Nytimes.com 2010). At this stage the overall economy went through a slump in term of minus GDP growth rate and industrial production growth, extreme low business confidence and double digit um-employment rate as we can see from the figures above.

 

 

Stage 3. Second half of 2009 to present

Beginning on the second half of 2009, enhanced by the positive effect of the ambitious fiscal policy and loose monetary policy, the US economy resumed growing though the recovery’s strength and outlook remains uncertain as we can see from the um-employment rate trend that the um-employment rate is still remaining above 8% representing an over capacity of the industrial output compared to the demand of the market during the current economy conditions. The slowing down of the economy recovery became obvious not only can be observed in um-employment rate but also in other key economy indicators such as industrial production growth and business confidence. According to the Institute for Supply Management, the manufacturing index registered 53.5 percent which is the first reading below 60 percent for 2011, and according to the most recent report in August the Production Index registered 48.6 percent, indicating contraction for the first time since May of 2009. Slower growth could also be seen from other index as shown in the table below.

 

Table 1. Key index performance in August 2011 Manufacturing ISM Report On Business

By reviewing the various data and analysis and also based on my understanding, the economy recovery is underway in the United States it could take a longer period of time than expected for the following reasons:

Firstly, as the economy stimulus was fading out it seems that the private sector alone can not sustain enough of economy growth momentum itself. This argument is also supported by Warren Buffett, perhaps the United States’ most famous investor and chairman of Berkshire Hathaway (BRK.B), who claimed that the United States is “still in a recession” and it is the is the regenerative capacity of American capitalism that could not happen overnight (Dailyfinance.com 2010). What is more, the ambitious fiscal policy also resulted in over debt and deficits which triggered a downgrade in the US credit rating (S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government’s budget deficit and rising debt burden) and even the government wants to continue the ambitious fiscal policy its ambition will be stopped by the large deficits that are still troubling the Obama government (Reuters.com 2011).

Secondly, the recovery of the real estate is slowing down with uncertainties. As the industry that triggered the economic crisis and being the centre of the crisis, the investor confidence of the real estate industry is yet to be restored. According to the Case-Shiller index, US house prices fell at an annualized rate of 4.2 per cent in the first quarter of 2011 disappointing the investors (Ft.com 2011). What’s more, under high um-employment rate and external risks such as natural disasters, the consumer confidence is dropping. According to the recent survey, 61% of the US citizens believe that it will be difficult to restore the life quality that used to enjoy before the economy crisis.

 

 

Central European countries

 

The case in Europe is more complex, the overall economy in Euro zone is on the way to recovery but with different pace in different areas. In general the Western Europe provides less growth momentum than the Central Europe which includes Austria, Czech Republic, Germany, Hungary, Liechtenstein, Poland, Slovakia, Slovenia and Switzerland. According to the analysis Ph.D. Kris Bledowski (2011), forecasts for gross domestic product (GDP) oscillate around 1.5 percent growth for the Euro zone for 2011 and approximately 1.8 percent growth in 2012 while the GDP growth in Central Europe is expected to reach upward of 3.5 percent in 2011 and 3.8 percent in 2012. Also the growth of economy varies in different Central European Countries.

In the near future the economy recovery of Central European countries will be substantially driven by two factors: on one hand Central and also Eastern Europe enjoys significant competitive advantages over the BRICs (Brazil, Russia, India, China) and other emerging markets (Rsmi.com 210) because of the area’s logistical advantage as it is closer to the EU market geographically; on the other hand the Central European countries are currently enjoying an investment led growth and this grow will be enhanced by the large inflows of EU Structural and Cohesion Funds and other international funds seeking shelter from the financial crisis.

(b) Do you agree that the emerging economies never suffered the effects of the crisis mentioned in this statement? A balanced discussion is expected in the context of the future dominance of the emerging economies and the risks and challenges faced by these countries (1000 words).
Yes, I do agree that the emerging economies never suffered the serious effects of the crisis experienced by the developed countries such as EU and the United States among current financial crisis. Though the financial systems of the emerging economies were not immune from the so called global financial crisis, they did experienced less severe outcomes. One reason was that the financial systems of the emerging economies were relatively less developed; another reason the emerging economies were spared from the worst of the financial crisis was that they were treated by the international investors as a safe haven from the sharp downturn in the developed country financial markets (International Monetary Fund 2008, p.48). And suffering much less impacts, the emerging economies seems to speed up the pace heading to a future dominance in the global economy while the developed economies slow down their growth, but there are still risks and challenges faced by these countries.

Future dominance of emerging economies

The possibility of the future dominance of the emerging economies had long been discussed by a lot of scholars in term of various predictions. According to Doole and Lowe (2008, p.38), it is anticipated by 2050 the combined GNP of the emerging economies will eclipse that of the developed countries which is in accordance with IMF (International Monetary Fund)’s estimation that in the later five years term the emerging economies will keep an approximately 7 percent annual growth while only less 3 percent annual growth is expected in the developed countries. In my opinion, the slow growth is what the existing leading economies such as EU, US and Japan can best achieve if not falling into stagnation, and the future dominance of emerging economies will eventually come because of two major reasons: firstly, the greater population bases represent the future market and labor force, the population advantage of the emerging economies could be seen from the fact that the BRIC (Brazil, Russia, India and China) countries in 2000 has a population 3.9 times than that of the G6 countries (Jain 2006, p.287); secondly, with the help of the multinational companies that are operating  without borders, emerging economies have found the shortcut to catch up with the world’s most advanced countries in technological innovations in the increasingly strengthening economy tie in the globe (Dolfsma, Duysters & Costa 2009, p.2), these ways include technology spit over effect, using a follower strategy and so on. The increasing up-to-date technology innovation together with lower cost of labor force and operation cost will ensure that the emerging economies will achieve the future dominance by keeping sustainable economy growth.

Risks and challenges faced by emerging economies

The first challenge faced by the emerging economies is the over reliance on the export-led industrialization by using which countries concentrates on developing domestic export industries capable of competing in overseas markets. In the current situation, more and more emerging economies are replacing the import-substitution industrialization with the export-led industrialization. The situation in the Southeast countries is more typical but such growth mode has risks which are exposed at the beginning of the current economic crisis. For example, the Asian Tigers which are some of the world’s most dynamic economies with around 47 percent of the GDP were left with excess manufacturing capacity and high um-employment rate (Kegley & Raymond 2010, p.120). Similar cases could also be found in the major emerging economies. For example in China, news suggested that nearly half of China’s toy factories closed in 2008 as the financial crisis tightened its grip (Yueh 2011, p.185). Though the financial crisis has exposed the risk of over reliance on the export-led industrialization by the emerging economies, but export data after the crisis soon shows that the most emerging economies have returned back to the old growth mode. These suggest that risks will still exist.

Another major challenge faced by the emerging economies is the high inflation rate. According to International Monetary Fund (2008) many emerging and developing economies continue to face the challenge of ensuring that current strong growth does not build up inflation or vulnerabilities. As we know based on the economy knowledge, a mild inflation rate is actually encourage economy development, but to some emerging economies the current inflation rate is far from what could be deemed as acceptable. And to combat the inflation risk, one rule can be followed which is increasing the labor compensation in line with the average productivity growth plus a targeted rate of inflation (Engerman & Gallman 2000). The high food price led high inflation in China that causes substantial difficulties to the people is one of the case describing the risk of the high inflation issue. But it seems that implementation of the rule is more difficult for the emerging economies which amounts the risks and concerns.

 

Question 2

 

As impressive as has been the positive contribution of the emerging economies to global economic growth, in your view, is there a parallel contribution in terms of global governance? Discuss with illustrative examples.
In my view there is a parallel contribution from the emerging economies in terms of global governance than in the global economic growth.

The global governance refers to all organizational aspects of the international system, whether institutional, regulatory or political (Fratianni, Savona & Kirton 2007, p.149). In other words, the term describes the establishment and development of multilateral rules and management system to promote global interdependence in term of both economic cooperation and political cooperation and other forms of cooperation. Another widely used definition of global governance is that it refers to collective actions to establish international institutions and norms to cope with the causes and consequences of adverse supranational, transnational or national problems (Väyrynen 1999, p.25). This definition focuses on the initiative of the government which is to resolve the various problems in the world which could be economic development related issues such as trade barriers and imbalance of development, social issues such as AIDS and environmental issues such as environmental destruction and deforestation.

When we talk about emerging economies, as suggested by Anthony Payne (2008, p.526) that we do not intentionally think about “from what they are supposedly emerging or at what point they began visibly to emerge or indeed what it means to emerge”, and it is meaningful for us to understand the emergence of these raising economies in another dimensions, the global governance to see how well they contribute to the global rule setting and problems solving rather than simply focusing in the GDP growth. Below we will discuss the contribution and performance of the economies to the global governance in two aspects: managing global problems and contributing to the growth of (liberal) world order.

Managing global problems

As there are too many problems globally to be dealt with which request for the joint contribution by both the leading economies and the emerging economies, below we will discuss three key global problems that concern people a lot: a CO2 emission that leads to the widely concerned global warming and world poverty.

Figure 5. Total 2008 CO2 emissions and emissions per capita
Source: Ucsusa.org 2009

Regarding the global warming issue, as we can see from the figure that shows the 2008 CO2 emissions in the major economies, in term of the total country emission though China was ranking as no.1 with 6534 million metric tons of CO2 emitted, it is closely followed by the United States and the digit is 5833 million metric tons. Similar cases could be found between some emerging economies and leading economies such as Russia and India, Mexico and Australia. In another word, it is true the emerging economies are becoming more and more polluting than they used to be which contributes to the increase of the global CO2 emission but as we can see from the figure, other major developed countries also are occupying top positions and the increase of the emission from the developing economies could be understood as they are walking through the old ways that the developed economies had done decades ago. Also in term of per capita CO2 emissions, Australia, United States and Canada are the top three polluters and the developing economies such as India and China are far away from being a top polluter due to their large population base. According to CO2 Energy Emissions Index (CEEI), released by UK in 2009, Australia, USA, Canada, Netherlands and Saudi Arabia were ranked as the top five offenders based on the per capita CO2 emissions (Maplecroft.com 2009).  Take the Kyoto Protocol issue as an example which entails emission reduction commitments and was opened for signature on December 11, 1997, China signed the pact on May 29, 1998 and even approved the Kyoto Protocol to the United Nations Framework Convention on Climate Change, and even though all European Community members and Japan ratified the agreement the world’s largest polluter, the United States still refuses to ratify the protocol with the excuse that large developing countries are exempt from the restriction. But the fact is that many of these developing and advanced developing countries such as South Korea, Brazil and India are already concerned that if the protocol is extended beyond 2012, their economies will suffer as they must comply with the emissions reductions (Monroe, Wicander & Hazlett 2007, p.29).

Figure 6. Absolute poverty rate in major emerging economies
Source: World Bank, World Development Indicators Database

 

Regarding the world poverty reduction, as we can see from an earlier summary in 2005, the economy development in the major emerging economies since 1995 had made substantial contribution to the global poverty reduction by developing their own economy though with different changes in poverty reduction. The largest contribution comes from China, the most popular and fastest growing economy, and the continual growth of these emerging economies will be critical to the global poverty reduction. According to estimation from The World Bank (2009) an additional 120 million people will be pushed into absolute poverty in the end of 2010 in the developing world due to the slowdown of the economy caused by the global financial crisis. But it is believed that the actual number will less than 120 million due to the continual growth of the emerging economies and so we can see that the poverty reduction has greatly contributed by the emerging economies’ economy strong growth which if slow down to a large extent will revert the trend. Another issue that reduce the effect of the economy growth on poverty reduction is the increased inequality which have been found in China, India and other developing countries, the reasons for the inequality are a lot and the policy makers should pay attention to the evolution of the income inequality for both their own sake and also for the improvement of the poverty dividend that contribute to the poverty reduction (OECD 2010, p.109).

Contributing to the growth of (liberal) world order

As the major economies such as Brazil, China and India increasing turn to international trade as a critical component of their development strategies, many of them are actively participating in the shaping of the international new order and building of the strategic trade partnership. In the world’s largest economy constitution, WTO, the emerging economies have been playing a more and more influential role. For example, China in September 2007 had the first time filed a complaint individually challenging the US preliminary anti dumping the countervailing duty determinations on imports of the Chinese glossy paper (Sornarajah & Wang 2010, p.189). And there are more and more emerging economies enter into WTO and using the WTO dispute settlement process to resolve the trade conflicts.

Another trend that comes together with globalization is regionalism by using which regional states often move towards cooperation to find regional solutions to common problems and compete with other regional competitors (Leong 2009, p.220). For example, with the increasing integration of the Asian economy and its global rise that asks for deeper and more extensive cooperation, one important fruit of the Asia regionalism is ASEAN. ASEAN or Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand ( Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam joint afterwards). ASEAN is set up with the initiative to enhance the connection between the region’s economies in trade, finance, technology, labor and the macroeconomic linkages (Kawai, Lee & Petri 2010, p.5). With the rapid raise of China, in November 2001, agreement was reached between China and ASEAN to establish a free trade area within 10 years. Between 2003 and 2008, trade with ASEAN grew from US$59.6 billion to US$192.5 billion (Capling & Low 2010). The ASEAN-China FTA has provided another important mechanism for shoring up economic stability in East Asia and drive the economic growth in the region.

In conclusion according to what we have discussed above there is a parallel contribution from the emerging economies in terms of global governance and in the global economic growth, though they are not shaping the global governance in term of shaping the world order and common rules as strongly as what US and EU has done so far, it is important to for to understand that even in term of economy the emerging economies are still playing within the rule made long ago by US and it takes time for the emerging economies to change such rules.

 

 

 

Reference

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