Globalization and Its Impact on China
Published on June 18, 2007 by Prit in Business and Society
The impact of globalization on China’s economy and strategies used by China in its economic development process.
Globalization refers to the process of increased integration between different countries and economies and the increased impact of international influences on all aspects of life and economic activity.
China is located in the continent of Asia with the highest population in the world of 1.3 billion people. They are the fastest growing economy due mainly to foreign direct investment in which occur because of cheap labor rates and manufacturing costs. With the tremendous progress in the last decade China has reduced poverty dramatically thanks to an economic system increasingly open to trade and foreign investment.
Their political system is run by the communist party in which according to the corruption index rated from 0-10 with 0 being absolute corruption in the political system. China ranks 71 out of 145 nations with the index at 3.4. Although China is a communist country they are taking a very western approach to how they are run with trying to become a much bigger player in globalization and using strategies in order to promote economic growth and development.
On the 17th of September 2001 China was admitted membership into the World Trade Organization after 15 years of lobbying for the position. They were then able and were participants of the Doha round on the 10th of November 2001. “International economic cooperation has brought about this defining moment in the history of multilateral trading system,” said Mike Moore, WTO Director-General, at the conclusion of the meeting of the Working Party on China’s Accession.
Under the chairmanship of Ambassador Pierre-Louis Girard of Switzerland, the Working Party agreed to forward some 900 pages of legal text for formal acceptance by the 142 member governments of the WTO.
As a result of these negotiations China has agreed to undertake a series of important commitments and rules it must follow by, some of these include:
China will provide non-discriminatory treatment to all WTO members. All foreign individuals and enterprises, including those not invested or registered in China, will be accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade.
Price controls will not be used for purposes of affording protection to domestic industries or service providers.
The WTO will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation fully in compliance with the WTO agreement.
China will not maintain or introduce any export subsidies on agricultural products.
“Now this economy will be subjected to the rules-based system of the WTO, something which is bound to enhance global economic cooperation “, said Mr. Moore.
As a result of this negotiation, China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. This more stable environment with hopefully then lead to a decrease the level of corruption in the political system which will lift its index and ranking as so then will become more attractive for foreign investors, to China’s benefit and to the traders.
ECONOMIC GROWTH
The 2003 statistic provided by the Market Economy textbook displays China Producing their Gross National Income of $1417 [US Billion] with a ranking of sixth.
This indicates that a lot of output comes out of China, but one must encounter the population when calculating the real output of a nation and which China has a GNI per capita of only $US4980 with a rank of 119.
Between 1965 and 1979 the gross domestic product grew at a rate of 6.4 per cent a year, and between 1980 and 1988 the increase was 10.3 per cent annually. The growth rate dipped below 4 per cent in 1989, but returned to well above 10 per cent annually in the early and mid-1990s.
The 2005 growth rate started at strong at 9.5% and flattened out to average to 9.4% for the 2005 year. Since 2002 the Industrial production has increased by 15% along with the Consumer demand, which increased by 10.1%.
With reference with the agriculture sector as a % of GDP, has decreased from 29% in 1997 to just 13% in 2003, this is a result of more industrialization, more infrastructure and investments into China, and so some farms have been converted into cities and factories. Another factor due to the decrease into agriculture is the fact that this is a percentage of the GDP and expresses the fact that all other industries are producing a lot more and growing more than the agriculture industry itself.
Much of the growth as stated before is attributed to the Foreign Direct Investment increase, this is a very attractive market for western expansion. This is the result of a more market-based economy with globalization and deregulation by the Chinese government. These recent trends of growth that averages 9.4% growth rate over the past decade is 1.7 % higher than the Asia region which stands at an average growth rate of 7.7%, while the average growth rate of the rest of the world is at approximately 2.65%.
With China being a major economy in the world, they are usually only influenced by another major economy which now is the USA.
ECONOMIC DEVELOPMENT
While economic growth has resulted in improvements in the general quality of life in China, these gains have not been shared equally within the economy.
According to the Human Development Index China is ranked in the middle Human Development with a GDP per capita of $US 4580.
This shows that over the past two decades or so that the Human Development Index has increased by more than a third in the past twenty-three years as shown below. The current situation in China now only sees 16.6 % of the population in absolute poverty.
* 1980 HDI = 0.554
* 1990 HDI = 0.625
* 2005 HDI= 0.745 [ranked 94th currently]
These inequalities that exist in China are divided into certain sections in which you would find that especially qualities of life differ to these factors of rural/urban areas, east/west provinces and whether you are a male or female.
Examples of this are seen in these statistics provided by “The Corporate Classroom”.
* Urban incomes are an average of $US828: up 8.5% from 2002.
* Rural incomes $US211: up 5.7% from 2002.
* These growing income gaps between the rich and poor causing economic and social imbalance.
Positive factors that have occurred with the help of globalization is due to the rise in the HDI level and the statistics that contribute to the factors used in determining the HDI are as follows:
* Life expectancy at birth improved from 63.2 in 1970 to 71 in 2005.
* Infant mortality rate decreased from 35 in 1997 to 32 in 2003 [per 1000 live births]
* Adult literacy [% aged 15+] from 78.3 in 1990 to 90.9 in 2005.
Although you can argue that the income inequality rising is a negative effect, you cannot dispute the fact that even though this occurs, the rise in income for everyone is a major positive effect with the astounding amount of Chinese people coming out of absolute poverty and even with the HDI index rising. China is in a rapid transition from the once third world nation into one that is almost first class.
In 1997, savings deposits of urban and rural residents reached US$560 billion, over 218 times that of 1978 with an average annual increase rate of 32.8 %. Plus foreign currency savings, debentures and stocks, the amount of financial assets owned by rural and urban residents had exceeded US$725 billion.
The pattern of consumption underwent positive changes- the Engel Coefficient of both urban and rural population lowered by 11 and 12.6 percentage points. In conclusion of the economic development I would have to say that China has experienced positives from
Globalization, even though I have en-taken that they now have a higher Gini index, but the fact is that it has increased peoples living conditions, HDI levels and income to the poorer people.
UNEMPLOYMENT
The increased exposure to the global economy has resulted in millions of jobs being cut from state owned enterprises. The statistic shows that in 2001, 5.15 million workers were retrenched from state owned enterprises; it was mainly due to that the restructuring in many inefficient industries.
Although China used to have really good employment in the past, today the unemployment is increasing as in 1997 the unemployment rate was 3.1% and in 2003 the unemployment rate had risen to 7.8%. This is not a very good sign to the government and some reorganizing needs to be made by the communist party for the China’s welfare and the budget because by the end of 2003 almost 3.13 million people were receiving unemployment benefits.
TRADE
Prior to 1978, China’s trade was conducted under a strict system of state trading where approximately a dozen foreign trade corporations monopolized all foreign trade. Under the central planning regime, imports were minimized and exports authorized only to the extent needed to pay for imports. Over the last twenty years, the system has changed dramatically and China’s trade has expanded enormously. Its share of world trade has risen from 1% to 3% over the last quarter century and the World Bank projects that it will triple again by 2020, making it the world’s second largest trader.
According to the statistics made in 2003 by “The corporate Classroom 2004” China is currently the 10th largest trading nation. 2004 forecasts may increase this ranking to 4th.
The accession into the WTO since the 17th of September 2001 encourages trade liberalization and opened more accessible markets to China. The total net volume of trade in 2003 increased by 7.5% on the previous year.
In 2003 China’s exports were up by 32.3%
Imports were up 40.5%
Tourism is an increasing industry, which is up 9.7%
In the last decade globalization and the entry into the WTO has made China a more attractive country to invest and travel to, along with this and also their quick response to the rest of the worlds interest in China they have managed to turn around in less than ten years a CAD into a CAS.
These trade flows are very positive in relation to China with the second biggest trading nation in the world.
DISTRIBUTION OF INCOME
A main indicator to measure the income inequality is to use the Gini coefficient method as in 1990 the level was as 0.25 and then calculated in 2005 the level has risen to a level of 0.447. This is the comparison to Australia’s Gini co-efficient index that now stands at the rate of 0.294 [2003-2004]. This increasing gap of income inequality is becoming more one of the extremes-causing economic and social imbalances.
FOREIGN DIRECT INVESTMENTS AND TRANSNATIONAL CORPORATIONS
FDI and TNC’s have increased rapidly since globalization and the opening of markets and deregulation by the Chinese economy. The FDI has increased by 19% since 2002. Some statistics and developments concerning the development in TNCs and FDI include:
In 2003 some 34 000 new FDI projects and enterprises were approves.
FDI and TNCs encouraged in modern agriculture, in high tech industries, infrastructure and construction.
Focus is on the development of the western regions, and the re-engineering of State Owned Enterprises.
Foreign investment capital became a major factor in growth, with US$30 million of investment in 1994. This rapid growth has caused some problems, such as high inflation rates in urban areas and increasing economic inequalities between regions and social groups.
ENVIRONMENTAL ISSUES
There is concern that China may pursue unsustainable practices in an attempt to maximize opportunities of globalization. China perhaps has become too absorbed in becoming the fastest growing economy with such high growth, development, and HDI levels that environmental issues are not seen as being so important and the issue is just being ignored.
The air pollution in South East Asia is a particular problem with almost five times more pollution in the air than some parts of Sydney’s pollution. These environmental problems occur due to the increasing industrial production contributing to poor environmental quality and increasingly frequent blackouts. With their increased use of oil used in production of such industries the rest of the world can feel the impact on the increase on a barrel of oil due to the demand created by China’s increased consumption.
STRATEGIES USED TO PROMOTE GROWTH AND DEVELOPMENT:
OPEN TO THE WORLD POLICY
In general China has adopted a more open policy that is in keeping with the WTO stance on trade liberalization.
China continues to actively seek FDI and develop links with the international economy.
FDI AND TRADE POLICY
* Sustained economic growth rests with continued investment and trade.
* China actively seeks FDI and will continue to do so.
* Removal of some 120 regulations that limit private capital inflow
* China’s export base is being broadened.
* Businesses are being encouraged to invest and compete for foreign contracts
* Key equipment and technologies are being imported to develop domestic industries.
* The liberalization had a fairly significant impact with the removal of government controls over prices, reduction of trade protection and also with the liberalization of investment and financial flows.
MICROECONOMIC REFORM
* China is committed to the reduction of administrative intervention
* The financial system is being reformed and to some extent deregulated.
* Consumer credit developing.
* Continued reform of SOE’s.
FISCAL POLICY
* Much of the government expenditure is directed towards infrastructure economic redevelopment and job creation.
* Spending on education and health is increasing.
* State is committed to an active role in stimulated the economy through fiscal policy.
* In 2005 the fiscal revenue soared 18.2 % or more than 50 billion US$ for the first 10 months.
WELFARE POLICIES
The immature welfare system must be developed to address rising unemployment.
Income protection insurance schemes being proposed for rural areas.
Job creation is important to addressing welfare problems of the economically disadvantages regions. As stated before, China is paying out welfare payments to over 1.3 million unemployment benefits. Will careful and accurate restructuring of the Chinese economy not so much payouts would be required thus a high budget to spend on other things.
The current position that China is in [as quoted by the “Gittins on Saturday” article by Ross Gittens in the Sydney Morning Herald, weekend edition on the 3rd of December 2005.] is a transition from industrial to knowledge-based development. “Since 1949, rural China has for the most part broken free from economic isolation thanks to investments in basic infrastructure, development of a road system, basic disease control, lower fertility rates, increasing literacy and so on.” He also mentions how China has moved to a more market based economy due to the globalization and China being more opened up to the world market.
Deflation Looms: These extracts come from William Pesek Jr.
Officials in Beijing have used administrative measures to reduce over investment. Doing it slowly to achieve a soft landing means capacity growth remains high, causing an oversupply even when China’s annual growth of more than 9 per cent slows.
Cutting the interest rates may even worsen deflationary pressure by encouraging capacity growth regardless of corporate profitability; the plentiful liquidity keeps interest rates low and, hence sustains the on-going investment projects and funds new investments in bottleneck areas.
Pushing China toward deflation is a high savings rate. While Americans save too little, Chinese save too much.
China needs to get consumers to spend more. To do that, the government should privatize state owned assets, shift fiscal expenditures away from investment and modernize pension, health-care and education systems.
The impact of globalization on the economic performance on China has proved to be a positive one as summarized throughout this essay. Globalization has created positives in the Human Development Index, there is more literacy and a longer life span as well as higher incomes and less and less people coming out of absolute poverty each year. China are not just benefiting themselves by becoming a more market based economy but they are also creating positives through the rest of the world by selling their comparative advantage of cheap labor to many transnational corporations and Foreign Direct Investors.
Although that they do have had an enormous positive out of globalization they also had negative in pollution levels and the income inequality. Although these are not what an economy is looking for the fact is that the positives that China has experienced outweighs the negatives a thousand to one.
As stated throughout the essay China has embraced globalization with open arms and uses many strategies to help the impacts that globalization has to offer which included their entry into the World Trade Organization, their active role in NAFTA, deregulation in many industries, privatization of many government owned organizations and the reduction of tariffs by almost 35% since 1980.