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The aim of this essay is to examine the economic ramifications of the economies presented in the case studies. This review would focus on two papers in particular: "China's Coming Economic Recession" and "Stagnant Japan Rolls the Dice on New Age of Easy Money."
The impending economic recession in China
This article provides a history of China in the modern century, observing how its economy developed to where it is now, as well as the reasons of the current slowdown. The problem with China's economy may be related to the country's development paradigm, which is characterized by an ultra-investment-driven and export-oriented socialist regime. As such, the issues facing china may be attributed to the following elements; the institutional structures, the issue of rebalancing and structural constraints in addition to the transformation of the post-industrial society.
In dealing with the economic issues facing china in this study, it is vital for there to be room for error considering the fact that Chinese statistics tends to have a lack of clarity, not in the sense of concealing information but rather that the facts are not accurate enough to draw conclusions.
One of the greatest limitations to China’s growth model is that it is unstable, unsustainable, unbalanced with a clear lack of coordination. It uses the excessive investment driven model that came about the with an artificial control over the financial repression. Furthermore, it is accompanied by the furious growth of China’s economic growth. The major economic models observable in the article are the financial repression mode, the investment driven model and the export –based model.
Investment driven model: China is heavily reliant on external demand and investment with much of the investment being concentrated within the property market. After the global financial crisis of 2009, the increased dependency on this model shot up.
The growth in China’s economy comes about a steady increase in the rate of investment as a share of the Gross Domestic Product. The growth in investment took place in the context of the underemployed labor and excess industrial capacity. since the resources are underutilized, the rise in the rate of investment directly contributed to a higher growth rate in the GDP. Nonetheless, the maintenance of such a growth is steadily in the rising rate of capital formation as a share of the GDP. Resultantly, the decreasing rate of foreign demand is insurmountable in fulfilling the huge amount of investment in China.
This amount of over-investment in the republic of China was becoming increasingly wasteful and ineffective. The conclusion was that the level of overinvestment in china was equivalent to about 10% of the GDP and perhaps as high as 20%.
The Chinese model was initially strongly based around export growth. Its major assumption was that foreign consumption would fill in the gap between domestic investment and consumption. This open policy allowed China to access the World Trade Organization and fully integrate into the global system and catch the comparative advantage in the abundant supply of cheap labor. As a result of this, China’s export jumped more than tenfold particularly in the period between 1990 and 2005.
Nevertheless, it is impossible for China to avoid the aftermath of the global financial crisis of 2008. This led to a decline in the number of exports that led to an unfavorable balance of payment. With the suffering of China’s export, there was a terrible downturn that was influenced by a deficit and resulted in overproduction. In addition to the decrease in foreign demand, the Chinese model was also proving to be running out of growth drivers that have characterized cheap labor and no low hanging technological fruits. The most visible damage being experience in the production segment, that is, the manufacturing sector. This thus resulted a number of layoffs, companies gone bankrupt and so on.
Stagnant japan rolls dice on new era of easy money
Nearly two decades back, Japan was the powerhouse of the world’s economy. It accounted for nearly 14% of the global economy. However, presently, it only accounts to 8%. Most of the economic indicators show that the country is in the state of economic decline with a decrease in population and a stagnating economic growth. Resultantly, the values of property and share prices have constantly been on the decline. This current situation led the government to employ an exhaustive growth strategy yet there are potential growth elements in its market.
Looking at the greatest economic challenge at the moment, Japan’s monetary policy, which aimed at liberalizing its currency while internationalizing it on its own, was not bound to succeed as there were a number of loopholes associated with the policy.
Furthermore, in regard to the demography, it is observable that Japan’s population is ageing, implying a decrease in the workforce and subsequently in production. With the high rate of rural to urban migration, urban centers such as Tokyo are rapidly expanding at an estimated rate of 1% per annum. This overpopulation in urban centers increases congestion and also has a negative impact on agriculture as the “exodus” for white collar jobs and a good life are on the line.
Limited birth rates and low mortality rate for the aged are the contributing factors. With this in view, the ageing population is expected to increase by 45%. At this rate, Japan’s future is expected to experience economic decline if strategic policies are not implemented in time and also if they refuse to adopt to feasible policies within the economic realm. The Japanese policy making process, that is consistent of the direct measure taken by the central regime to stimulate risk bearing options to avoid deflation, may be a wrong move. This is as the policy stimulates the Capital from the state to flow into high risk assets within the global economy. Yet this policy is taking place at a time when the global assets are being inflated by the federal reserve policy and when the local currency is depreciating in value. It is however understandable that the Japan government is highly cautious of its economic power in the global field and thus the need to maintain its own stance and policy in the realization and establishment of economic growth with the fear of avoiding hyperinflation.
The lack of discipline within the central regime has resulted in a state of unpredictability as to the future contingency measures that will be put in place and their consideration of changing their monetary policy to suit their decision-making process. For instance, the unrealistic nature of the 2% inflation target. This ideology ignores the notion of the variation in the velocity of money. In addition to this, it seems that this notion has been perverted into the concept that price inflation is the actual cause of economic growth and an improvement in the standards of living.
In the application of Friedman’s theory of money, it seems that Japan seems to ignore the problems facing the inherent dollar standard and its effect on the exchange rate. For instance, under Japan’s regime of manipulated currency values, in which the exchange rates are not allowed to balance, we get an unbalanced trade and reduced domestic price inflation.
The above case studies both share one thing in common, the effects of a centralized regime on economic growth. For instance, some of the demerits of a socialist economy are inclusive of reduced incentives to work, reduced prosperity.
Most critics in the field of economics argue out that socialism is the main cause of reduced economic competition, that has resulted in slower economic growth and lower advancements in the technological sector. Advocates of capitalism further argue that the rate of competition between private entities results in a culture of innovation of companies that are constantly willing to improve their products in order to maintain the market share. In the socialist economy, where the government is I control of production, competition is eliminated and innovation stifled.
It has been argued by a number of critics that socialism reduces the incentive to work and make great accomplishments as it is based upon the distribution of wealth that is more equal as compared to capitalist economies. More work does not necessarily result in greater rewards, as is the case in Japan, where laborers are known to be overworking. As a result, the workforce is left with little aspiration and is unlikely to work hard to their potential.
Furthermore, it is argued that socialism reduces the overall prosperity by the reduction of the potential to maximize profits. Equalizing the effects reduces or rather prevents the ability of the economy to gain the most profits from its resources; implying utilization in the resources. Therefore, locations with advantageous resources have less chances of capitalizing on them and the most intelligent and enterprising individuals are left with fewer opportunities for economic growth generating less prosperity overall. As for the case of both countries, they should take to consideration that the liberalization methods must balance the needs of the developed and the developing countries in order for it to be fully effective.
The articles used in the study are an indication of the current trends in the economic sector of major world economics and a rea representation of the failure in the policies that are in use in the world today. It is however vital to understand that economists play a huge role in policy making despite the fact that their advice is always taken for granted in the political platform of most socialist countries. Despite the fact that economists tend to have some sense of influence in the greatest policy effects, it is worth noting that the policy makers should think about the world in a number of ways. For instance, injecting new ideologies in the policy making process in order to create a fundamental setting that can lead to the development of a better economy.
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