Essay
Question 1
Many factors influence the economic growth in the developing countries. These factors include internal government policies, political stability, domestic capital formation, investment, export policy and foreign aid among others. Collectively, these factors provide the most significant platform for economies in developing countries. The major problem in developing countries is that they lack proper policy to implement these factors to promote economic growth. This has led to high rates of unemployment, income inequality, inflation and poor economic growth among others. Thus, the paper will evaluate various factors that constitute economic in developing countries.
Globalization and income inequality have affected the economics in the developing countries. According to the standard trade theory , international market integration should reduce income gaps in developing countries in order to enhance development. This can be done by increasing the relative prices and demand for unskilled labor which developing countries have in abundance (Ha 523). However, income inequalities in developing countries have significantly increased at the same time that global trade and capital flows have surged. Therefore, the impact of globalization on income inequality has become a major issue in international and comparative political economy.
Similarly government has contributed significantly in income inequality in the developing countries. Most governments in developing countries redistribute income via taxation and welfare spending programs such as social retirement benefits and unemployment compensation. Hence, government can reduce income inequality in the developing countries by use of policies that can improve the living standards of people. Income inequality has increased because governments tend to increase taxes on the rich and redistribute wealth to less well-off citizens. Therefore, the power resources theory on developing countries confirms that government plays a significant role in the income inequality.
Some developing countries have demonstrated higher rates of growth than before. These countries include Brazil, India and China among others. This has happened due to adoption of openness in trade. The neoclassical trade theory argues that openness to trade should increase demand for labor in relatively labor-abundant countries which in turn should lead to a decrease in the unemployment rate in developing countries (Huang 770). However, the high unemployment rate has been a significant issue in economics of developing countries. The informal employment represents a significant share of a workforce in most developing countries. Across the developing countries , the majority of informal workers is poor and are informally employed. The rise of unemployment rate in developing countries is the impact of the great recession on employment and the global crisis of youth unemployment.
The role of financial development in economic growth has become a major issue in the developing countries. A well financial system may exert a positive impact on economic growth via major channels such as reducing information and transaction cost, improving the allocation of resources, increasing savings rate, promoting the development of markets and instruments that enables risk sharing among others. Financial institutions and markets can play a significant corporate governance role over other economic entities by monitoring the use of capital and exercising external pressure to enhance productivity in developing countries (Rabiul 12). However, the problem in economies in developing countries is to manage these financial institutions in order to enhance productivity.
Moreover, most developing countries have significantly eased restrictions on foreign direct investment (FDI) and offered tax incentives and subsidies in order to attract foreign capital. They believe that foreign direct investment can promote the economic growth. According to the neoclassical growth theory, an inflow of FDI stimulates economic growth by increasing the capital stock. The research indicates that FDI does not contribute to capital formation or growth in the neoclassical growth theory if FDI takes the form of mergers and acquisitions and when the proceeds of the sale of the assets are fully consumed (Herzer 397). Similarly, developing countries have failed to use the FDI to promote the economic development. For instance, the current meeting of WTO, where developing countries discussed about investment disposals to stimulate the economic development.
Inflation is another issue in the economics of developing countries. Inflation affects economic growth both positively and negatively via various channels. The effect varies with institutions structure of the economy. Inflation is lauded for facilitating economic growth by encouraging capital accumulation and increasing price flexibility. Low inflation can help to promote the labor and product markets because it increases relative price flexibility. Moreover, an increase in the expected inflation rate may lead to a higher capital intensity and economic growth as higher inflation makes capital more attractive to hold relative to income. On the other hand, inflation tends to lower real balances in the developing countries leading to the diversion of real resources to the making transactions.
In a recap, economics of developing countries are influenced by various factors. It is marked by high rates of unemployment and inflation which affect economic growth. Similarly, the governments in developing countries impose policies that affect income inequality in the economy. Developing countries believe that they can use foreign direct investment to promote the economic growth. Their argument is supported by the neoclassical growth theory which supposes that an inflow of FDI stimulates economic growth by increasing the capital stock. Despite adequate supply of resources and demand for labor, there is poor economic growth in developing countries.
Question 2
The financial crisis of 2008 marked the beginning of what was widely referred to as the great recession. Many countries including the United states experienced their worst economic contraction since the financial crisis. For recent years, the United States economy has experienced from persistently high unemployment rates, which have impended a dynamic economic rebound. Therefore, the structural unemployment is caused by changes in the structure of the economy which eliminates the need for certain types of workers. Structural changes in employment contribute to an absolute decline in the number of production and maintenance of workers in various industries. Structural unemployment falls under the optimal labor hiring Decisions, which deals with labor hiring decisions such as employment.
The unemployment rate has increased by more than 9.6 percent. Economists and policy makers have engaged in heated debates about the underlying cause for the sustained levels of joblessness (Valletta 8).Much of the debate has focused on structural unemployment. Structural unemployment suggests there is a significant mismatch in the number of people who want to work and the number of jobs that are available for their skills in the united states. The occurrence of structural unemployment means there are no easy fixes and any recovery in the labor market. The structural unemployment comes about in a long run and can arise regardless of the level of demand. The factors that cause the shift of structural unemployment include technology, the composition of final demand and the location of industry change. They in turn affect the composition of labor skills requirement. The structural unemployed are victims of either their skills are longer used in output and are also not transferable to other occupations, or their skills are required in smaller proportions to the output and skill required are in low supplies. The two basic changes in technology and final demand product mix are aggregate in nature. Localized increases in structural unemployment can also occur where there are shifts in the location of industry or exhaustion of raw materials. Similarly, this can occur where aggregate phenomena are concentrated regionally.
Therefore, the key to the structural problem is the mismatching of specific labor skills demands and supplies where there is limited transferability of skills and limited substitutability among skills. For instance, when technical change renders skills absolute uselessness, no amount of increase in demand or supply of any other skill will provide employment for the displaced workers. This can only happen if the unemployed are qualified and willing to do some other type of jobs. Therefore, the less adaptable the kill endowments and the less elastic the technological coefficients with respect to the substitution of other skills, the more workers approach condition referred to as pure structural unemployment. For instance, the advanced technology in the United States requires education above the high school level, hence the displaced persons who have less education are rendered structurally unemployed. However, structural unemployment as a result of the obsolescence of skills and the smaller proportions of certain skill requirement in production , requires worker retraining for efficient liquidation.
The Beveridge curve is used to compare the job openings to the unemployment rate. It is considered a proxy for how well the labor market’s matching function is working. In the period of recession it is expected that lower vacancy rates will be followed by higher unemployment rates, while during expansion higher job openings rates will be coupled with lower unemployment rates (Diamond 412). Since the great recession in 2009, the Beveridge curve pattern in the US has been erratic. Therefore, the present condition is that the US unemployment rate is higher that is the number of job openings is low and vacancies are higher than the same unemployment rates during the great recession.
Whenever unemployment remains high for an extended period, it raises the debate whether the high unemployment rate is due to structural or cyclical reasons. The movement along the Beveridge curve are mainly assumed to reflect cyclical factors, which a shift in the curve itself is taken to reflect structural effects (Diamond 417). The periods of rising vacancies unaccompanied by falling unemployment reflect structural unemployment which is reflected in the united states.
Therefore, the structural unemployment in the United States is due to a higher long term level of unemployment. This structural shift indicates a more permanent change in the employment rate that will be unresponsive to cyclical stimulus. Therefore, the policy makers in the United States should concern about stimulating aggregate demand via monetary and fiscal measures. This is so because inadequate aggregate demand is a major factor in explaining why the current US unemployment rate is not decreasing faster. Since the structural unemployment occurs due to mismatch in the number of people who want to work and the number of jobs that are available for their skills in the united states, factors such as improvement in technology and training can help in reducing the structural unemployment (Valletta 13). This is so because structural problem is the mismatching of specific labor skills demands and supplies where there is limited transferability and substitutability of skills.
Question 3
Slower China Growth
The study focuses on the growth rate of the Chinese economy which is showing signs of slowing down. This falls under productivity verses cost which discusses the economies of scales such as GDP. This is reflected by its GDP growth which has from the 10 percent rate of the past two decades to 9.3 percent in 2011 and 7.8 percent in 2012. This reflects an edged lower to 7.7 percent in the first quarter of 2013 (Ken 12). Both lagging and leading indicators in China suggest that growth is constantly slowing down. The purchasing manager index decreased to 50.5 in April indicating that industry’s profits had a slight margin over other sectors, which is a sign of further possible slowdown in output. Similarly, a sub-index measuring new export order decreased at the same time in 48.6 percent reflecting poor demand in the OECD countries.
The Chinese GDP needs to grow by around 8.5 percent a year to employ school and college leavers based on OECD calculations (Ken 12). The Chinese top priority is always social stability which seems to be threatened if living standards declines by income reductions, rapid inflation and high rate of unemployment (Haltmaier 23). Therefore, maintaining relatively high GDP growth is a significant macroeconomic objective. Policy makers get anxious when GDP threatens to decline, which reflect a decline in the business cycle that has characterized the Chinese economy since economic reforms were initiated.
However, the Chinese government is controlled in its ability to boost the economy. The financial crisis of 2008 made them to pump in the US$600 billion via a fiscal stimulus program to counter the effect of the global economic crisis. This reflects manipulated overinvestment and overheating, while pushing up bad debts. This has made Chinese policy makers to find measures that can restrain inflation and prevent the property bubble from getting so big that it can burst. The Chinese had promised Chinese yuan amounting 1 trillion in 2012, in the form of infrastructure projects to maintain growth.
In additional, the Chinese government is trying to rebalance the economy away from high investment in labor-intensive export manufacturing and towards greater private consumption. This policy tends to set back each time a new stimulus program is adopted that will boosts fixed capital expenditure as a proportion of GDP. However, this pose a risk that growth will dip below recently experienced rates, but it is not possible because of the massive hinterland to expand into that china experience.
According to OECD’s China surveys, urbanization alone will keep growth high over at least the next decade, given there is no financial collapse. Similarly, there will be no slower economy because Chinese authorities will continue economic reforms that are already initiated to enable some vital economic restructuring which is expected to be a gradual process. For instance, the internationalization of the Chinese currency, which if facing revaluation issue because it is undervalued.
Similarly, the rest of OECD countries will not let China economy to slow because they need Asia’s largest economy to remain healthy in order to encourage the purchase of products and provide employment –generating opportunities. As the global factory, China is a massive exporter, but it is a major importer. In 2012 , China accounted 17.4 percent of US merchandise exports. For Europe, exports to China have been among the largest though they cannot match the high amount of total trade in the US (Ken 13).
China has also constant foreign direct investment flows which keeps its healthy economic growth. This is so because China has increasingly significant source of investment capital. For instance, in 2012, non financial foreign direct investment from China amounted US$77.2 billion and the China plan target about U$150 billion in 2015. Therefore there is no way the Chinese economy will slow down. The investment will increase as enterprises will be forced to focus on demand- boosting by outsourcing projects.
China continues to expand as a market for the OECD and emerging market expertise, and also as a source of capital for both in the next few years. Its economic restructuring strategies forces to enact measures that will benefit the low income earners, which will promote living standard by giving them housing and health care among others. China has also managed to increase labor productivity via education which will also redistribute increase in income towards rich people who have high purchasing power. This will help increase the share of domestic consumption in national income.
Although the economic indicators indicate the slower growth in China, its economy is brighter. Its ability to maintain the value of the Chinese yuan is a clear indication of high economic growth. China’s exports have contributed to the expansion of the economy because China is the largest exporter in the world. China tends to follow the reforms offered by the OECD as policy options that help generate a positive growth. Therefore, China has shown constant growth in an economy which is also expected to be better in future.
Works Cited
Diamond, Peter. "Cyclical Unemployment, Structural Unemployment." IMF Economic Review 61.3 (2013): 410–455. Web.
Ha, Eunyoung. "Globalization, Government Ideology, and Income Inequality in Developing Countries." Journal of Politics 13.4 (2012): 541-557. Web.
Haltmaier, Jane (2013), "Challenges for the Future of Chinese Economic Growth", International Finance Discussion Papers Number 1072, Board of Governors of the Federal Reserve System, Washington, D.C
Herzer, Dierk. "How Does Foreign Direct Investment Really Affect Developing Countries’ Growth?" Review of International Economics, 20.2 (2012): 396–414. Web.
Huang, Li-hsuan. "The Coexistence of High Unemployment and Good Economic Performance in Large Open Developing Countriesroie." Review of International Economics20.4 (2012): 767–780. Web.
Ken, Davis. "Will China's economy avoid the doldrums?" OECD Observer 1.294 (2013): 12-13.
Rabiul, Mark. "Banks, Stock Markets and Economic Growth: Evidence from Selected Developing Countries." Decision 13.3 (2010): 1-26. Web.
Valletta A, Rob. "Is Structural Unemployment on the Rise?" FRBSF Economic Letter34.4 (2010): 1-16. Web.
