Effect of Globalisation on China's Economy

Globalisation has had a dramatic affect on the Chinese economy.

Discuss.

Introduction

In this essay I will be looking at the effect the growing globalisation has had on the Chinese economy. I will look at both the positive and negative effects globalisation has had on China and in general. I will start by briefly describing the term globalisation.

Globalisation

Globalisation is the term used to describe the continuing integration of economies from different countries. Globalisation has been brought about by the reduction in cost of transportation and communication from country to country. Also, artificial barriers of flows of goods and services have also been lowered. These lowering of barriers have, in turn, brought about increased market liberalisation. Globalisation has also brought about the need for international organisations to govern and offer advice for globalisation. These organisations include the World Trade Organisation (WTO) and the International Monetary Fund (IMF).

Affects of Globalisation

Globalisation and liberalisation has caused a few problems to countries. These problems occur due to the way the liberalisation is pushed on developing countries by the IMF. Indeed, many authors state that the fundamental ideas of liberalisation are sound it is just the pace the measures are taken onboard by the developing countries that needs to be carefully considered. The argument was voiced by Stiglitz (2002) who stated that the ‘IMF vigorously pursued privatisation and liberalisation, at a pace and in a manner that often imposed very real costs on countries ill-equipped to incur them’.

Authors do state that liberalisation can only benefit a country if the pace of liberalisation is right. Liberalising too quickly can do more harm than good in the long term. Lichtenstein (2000) reported that China, through gradual liberalisation, has grown into one of the world’s biggest economies. Indeed, it has been forecasted that in 20 years time China will be the world leader in terms of the size of economy. Probably the best argument for liberalisation through sequencing is that of India. This was argued by Tripathi (2003). In 1991 India plunged into financial crisis. Their political leaders decided the best cause of action was to liberalise their market. However, this was only done gradually as the population would never have agreed to complete liberalisation from the beginning. Now 12 years later India is one of the strongest economies in the world and is lending money to the IMF. The Indian economy is expected to grow at between 5 and 8 percent a year. Also, India was in the position to write off £12.5 million worth of debt owed to them by heavily indebted countries as an act of generosity.

Other authors argue for liberalisation but also say that the underlying policies and financial structures of individual countries need improving if liberalisation is to be beneficial. Improved policies and financial structures will mean that market failure is less likely. Authors that argued this point include Ortiz (2003) and Gibson and Tsarkalotos (1994) who argue that ‘market failures hamper the liberalisation process’.

Liberalisation used properly can have huge benefits for individual countries. Increased inward investment will, in theory, stimulate growth and strengthen the economy. This inward investment will create new jobs and new projects that will benefit the local population. This initial investment will create initial growth and over time, through the improved education of the local population, domestic companies will start up that will be more efficient and competitive compared to the old domestic companies before liberalisation began. However, there is a potential problem with this theory. This comes about in the terms of what kind of inward investment there is. If some company invests into a country with a long-term strategy in place then this will be beneficial to the economy. However, if someone invests into a country as a speculator then this could cause problems. These problems will come about if the investor decides to remove they money. Long-term projects might be dependent on this investment and therefore run the risk of having to be downscaled or stopped altogether. This could lead to the economy collapsing. Solomon (1999) who stated that funding long-term projects with short-term funding can not be a good idea argued this. This point is supported by the arguments of Krugman (1995) who stated that increased liberalisation has led to ‘excessive speculation for which Mexico was not ready’. Also, Cypher (1998) argues about so-called ‘hot money’.

Other authors have also argued against liberalisation. Taylor (2000) argues that liberalisation does not have any positive affect on a countries economy. He argued that liberalisation in the countries he looked at ‘at best generated modest improvement and at worst was associated with increasing income inequality and slower growth’. Clift (2003) argued that liberalisation was to blame for the growing number of world crisis’ and, in turn, to the growing level of contagion, such as the Asian crisis in 1997.

Affects on the Chinese Economy

In this section I will look at some of the effects that globalisation has had on the Chinese economy. Many countries have tried to take advantage of the increasing globalisation, some with better success than others. No developing countries have taken advantage of globalisation better than those countries in East Asia. Indeed, countries from this region have been the most successful economies over the last 20 years or so. Good examples of this success come from India and, indeed, China. As I mentioned in the previous section, Lichtenstein (2000) reported that China, through gradual liberalisation, has grown into one of the world’s biggest economies. Indeed, it has been forecasted that in 20 years time China will be the world leader in terms of the size of economy.

China has grown into one of the most successful economies in the world and avoided going into crisis, especially avoiding the Asian crisis of 1997, by not completely following the guidelines stated by the IMF about liberalisation. China, along with India, has gradually opened up its market over the last 20 – 30 years. This slow transition has meant that the economy could adjust to a new system over time. Many other countries that follow IMF guidelines find themselves in economic crisis.

Another effect that globalisation has had on China is that it has experienced reduced unemployment and reduced poverty. Indeed, China has experienced the largest reduction in poverty in the shortest amount of time in history. The figure fell from 358 million in 1990 to 208 million in 1997.

China has also experienced an increase in the foreign direct investment it receives through increased globalisation. Foreign direct investment rose from $8 billion in 1990 to $41 billion in 1999. This increased foreign direct investment has also meant that China has more access to other markets and also has increased access to new technology. This access to new technology can be emphasized by looking at the mobile phone industry. Today, China is one of the top markets when it comes to the production and selling of mobile phones.

Through globalisation, China has gradually increased its economy and is now in a very strong position. Because of this China has been accepted as a new member to the World Trade Organisation (WTO). This has huge implications, because China is looked at as a developing country. Now that China has a seat on the WTO, the developing world now has a major voice to express its concerns on a global audience. Some of the major western powers on the WTO, such as the USA and the UK, have expressed concerns over this as they feel it weakens their own power.

Conclusion

To conclude, I can say that globalisation can be described as the coming together of individual countries economies. Trade barriers that existed before are becoming less and less. Globalisation has been found to have both advantages and disadvantages. Some advantages include the fact that it makes the economy more efficient and also the economy will become stronger. This is true with the examples of China and India. Some disadvantages include the fact that if the liberalisation is enforced too quickly then the economy could collapse and cause crisis, both in the country and in the local region. This was true with regards of the Asian crisis of 1997.

China has been able to take advantage of globalisation by undertaking liberalisation at a slow pace. This has meant that poverty has reduced, foreign direct investment has increased and they have been accepted into the WTO. Because of all this it has been forecasted that China will be the world’s biggest economy in 20 years time.

References

Salil Tripathi. (2003) The right way and the Indian way: who has written off poor-country debts and now lends to the IMF? Salil Tripathi on an economic miracle.

New Statesman (ISSN: 1364-7431) July 21, 2003 v132 i4647 p29(1)

Jeremy Clift (2003) Beyond the Washington Consensus. Finance & Development (ISSN: 0015-1947) v40 i3 p9(1)

Guillermo Ortiz (2003)Overcoming reform fatigue: Latin America and the Washington Consensus.

Finance & Development, v40 i3 p14(4)

Paul Krugman (1995) Dutch tulips and emerging markets. (global capitalism)

Foreign Affairs, v74 n4 p28(17)

Heather D. Gibson; Euclid Tsakalotos. (1994) The scope and limits of financial liberalization in developing countries: a critical survey. Journal of Development Studies, v30 n3 p578(51)

James M. Cypher (1998) The slow death of the Washington Consensus on Latin America. (Celebrating 25 Years) Latin American Perspectives, v25 n6 p47(5)

Taylor (2000) The consequences of capital liberalistion,

Challenge November 2000, Volume 43 Issue 6

Lichtenstein (2000) Competing perspectives on the liberalisation of Chinas foreign trade and investment regime,

Journal of Economic Issues, Vol 34 Issue 4

Solomon (1999) Money on the move, The Revolution in International Finance since 1980

Stiglitz (2002) Globalization and its discontents