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Chapter 3: Globalisation and Economic Development

Chapter 3
Globalisation and Economic Development
THE DIFFERENCES BETWEEN ECONOMIC GROWTH AND
ECONOMIC DEVELOPMENT
In comparing the standards of living between countries in the world it is important to distinguish
between the concepts of economic growth and economic development. All countries are trying to sustain
economic growth in terms of increasing their real GDP and living standards. However governments are
also pursuing strategies to raise the quality of life or level of economic development for their citizens.
Economic growth refers to increases in real GDP over time. Real GDP is a quantitative concept since
it involves increasing the productive capacity of an economy. This can lead to rising national output,
incomes, employment and living standards. Economic growth can come about from two main sources:
1. The increased use of resources such as land, labour, capital and entrepreneurship due to improved
technology or management techniques; and/or
2. The increased productivity of existing resource use through rising labour and capital productivity.
Capital widening occurs when the capital stock keeps pace with growth in the labour force. Capital
deepening occurs when the capital stock outstrips the growth in the labour force.
Economic growth leads to an outward shift of an economy’s production possibility curve or frontier,
enabling it to achieve rising national output, material welfare and living standards over time. Economic
growth is represented by an outward shift of an economy’s production possibility curve as illustrated in
Figure 3.1. Any point on the production possibility curves PP and P1P1 represents the full employment
of resources. For example, at point X on PP, the economy can produce a combination of OC consumer
goods and OK capital goods. However production combinations are limited to any point on the
curve PP. Economic growth can only occur if more resources are used, or existing resources are used
more productively, allowing the production possibility frontier to shift outwards from PP to P1P1. For
example, economic growth is represented by a movement from point X on curve PP to point Y on curve
P1P1. At point Y, OC1 consumer goods and OK1 capital goods can be produced or any combination
of consumer and capital goods as long as they fall along the curve P1P1. The economy at point Y can
achieve higher current living standards than at point X, with more consumer goods of OC1, and also
increase its future living standards, by increasing its stock of capital from OK to OK1 capital goods.
Figure 3.1: The Process of Economic Growth

Consumer Goods
P1
economic growth
P
Y

C1
C

0

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X

P
K

K1

P1

Capital Goods

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Chapter 3: Globalisation and Economic Development

© Tim Riley Publications Pty Ltd

In contrast to economic growth, economic development refers to the process of structural change
needed in an economy for economic growth to occur. Economic development is a qualitative process,
involving the development of an economy’s economic and social infrastructure. A major structural
change with economic development is the transformation of an economy from a rural based agricultural
society, to an industrial and service based urban society. The composition of the workforce also changes,
due to increasing specialisation of production, such as higher agricultural output due to improved
mechanisation, technology and farming methods. This allows resources, including labour, to be released
from agriculture into manufacturing and service industries, causing changes in employment patterns.
The construction of roads, railways, schools, hospitals, universities, dams, bridges, factories, power
plants, ports and airport facilities are examples of economic development. In Figure 3.2 the process of
economic development is shown by the linkages between saving, investment and resource use, leading
to economic growth. The development process involves the use of more resources and/or the use
of better quality resources (through higher productivity) to improve the distribution of income and
deliver real increases in living standards through a ‘trickle down effect’, where the benefits of economic
growth are spread throughout the whole population. Economic development involves improvements
in infrastructure, and the human, physical and institutional capital necessary to sustain economic
growth and improve the quality of life. Effective domestic and overseas demand are also important
in developing markets for exports, and in encouraging domestic saving and investment. Also greater
participation by a country in the process of globalisation can lead to increased foreign investment and
transfers of technology and management skills, which can assist the process of economic development.
Figure 3.2: The Process of Economic Development
Higher Standard of Living and Incomes

Income Distribution
institutions

population growth
Economic Growth

Exports

Efficiency

quality/productivity
of resources

Resources

quantity of resources

Investment

Saving
supply of saving

Year 12 Economics 2014

demand for exports

© Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd

Chapter 3: Globalisation and Economic Development

THE GLOBAL DISTRIBUTION OF INCOME AND WEALTH
Despite the economic benefits of globalisation, the rewards are not shared equally between advanced,
emerging and developing countries. The advanced or high income countries dominate global output,
trade and foreign direct investment. However global poverty, measured by the World Bank using
US$1.25 a day as the global poverty line, has been decreasing since the 1980s. The number of people
living in extreme poverty in the world fell from 1.9b (43.1%) in 1990 to 1.7b (34.1%) in 1999, and
to about 1.2b (20.6%) in 2010 as shown in Table 3.1. However the substantial reduction in extreme
poverty in this 20 year period disguises large regional differences in the levels of poverty.
Table 3.1 shows that the greatest reduction in poverty occurred in East Asia and the Pacific, where the
poverty rate declined from 56.2% in 1990 to 12.5% in 2010, and the number of people living on less
than US$1.25 a day fell by more than 700m. Much of this decline was in China, where poverty fell
from 60.2% to 11.8% in this period, leaving 400m fewer people in poverty. Between 1990 and 2010
the poverty rate in South Asia fell from 53.8% to 31%, but in contrast the poverty rate in Sub Saharan
Africa fell by less from 56.5% to 48.5%. Poverty rose in Europe and Central Asia between 1990 and
1999 before falling to 0.7% in 2010. Poverty in Latin America and the Caribbean, and the Middle East
and North Africa fell by more than 50% between 1990 and 2010. The World Bank estimated that there
were 700m fewer people in poverty in 2010 (1.2b people) compared to 1990 (1.9b people).
Table 3.1: Global Distribution of Population Living in Poverty - 1990 to 2010

(Share of people living on less than PPP US$1.25 per day)

1990 1999 2010

East Asia and the Pacific

56.2%

35.6%

12.5%

China

60.2%

35.6%

11.8%

India

51.3%

45.6%

32.7%

South Asia

53.8%

45.1%

31.0%

1.9%

3.8%

0.7%

12.2%

11.9%

5.5%

5.8%

5.0%

2.4%

Sub Saharan Africa

56.5%

57.9%

48.5%

World

43.1%

34.1%

20.6%

Europe and Central Asia

Latin America and the Caribbean
Middle East and North Africa

Source: World Bank (2013), World Development Indicators 2013, Washington DC, page 31.

According to the World Bank in its World Development Report 2013, the Millennium Development
Goal (MDG) target of reducing 1990 poverty rates by half by 2015 will be met if there are sustained
rates of economic growth in developing countries and a fairer distribution of income amongst the poor.
Growth is expected to be fastest in East Asia and the Pacific, and South Asia, which contains nearly half
of the world’s poorest people. Growth will be slower in Sub-Saharan Africa, the poorest region in the
world, but faster than in previous years, quickening the pace of poverty reduction. According to World
Bank forecasts the proportion of people living in extreme poverty will fall to 16% by 2015.
The Sub Saharan African region remains the poorest in the world and is most targeted by the World
Bank’s development aid. The median poverty line for developing countries was less than 2005 PPP
US$2 per day in 2008, with 2.4b people in the world estimated to live on less than US$2 per day. This
was approximately 43% of the world’s population estimated to suffer from extreme income poverty
with 1,125m in South Asia, 659m in East Asia and the Pacific, and 562m in Sub Saharan Africa.
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Year 12 Economics 2014

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Figures are in current (2011) US dollars.Source: World Bank (2013). 70 Chapter 3: Globalisation and Economic Development Year 12 Economics 2014 © Tim Riley Publications Pty Ltd © Tim Riley Publications Pty Ltd . Figure 3. Washington DC. This map represents economies classified according to World Bank estimates of 2010 Gross National Income (GNI) per capita.3: The Distribution of World Income in 2011. World Bank. World Development Indicators 2013.

has around 3% of the world’s wealth and accounts for 10% of world population. North America (such as the USA and Canada).4 shows regional shares of wealth for the global economy in 2010.026 to US$4. The richest countries in Asia (such as the NIEs and Japan) are estimated to have 24% of global wealth and 31% of global GDP or income. 2. North and South Africa (such as Libya and South Africa).4: Regional Shares of Global Wealth in 2010 North America 34% Europe 30% Asia Pacific 24% Latin America and the Caribbean 4% Middle East 3% China 3% India 1% Africa 1% Source: World Institute for Development Economics Research (2010). income per head of population) in 2011.035) are located in Eastern Europe (such as the Ukraine). Therefore North America and Europe account for 64% of global wealth. For example.e. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 71 . The high income countries (US$12.476 or more) are mainly located in Western Europe (such as the UK and France).475) are located in Central and South America (such as Mexico and Brazil). The least wealthy region in the world is Africa with just 1% of total global wealth. Figure 3. If China (3% of global wealth) and India (1% of global wealth) are included with the Asia Pacific region. 3. North America is estimated to have 34% of global wealth and 24% of global income or GDP. Eastern Europe (such as the Russian Federation) and Asia (such as China). The low income countries (less than US$1. it has a 28% share of the world’s total wealth. with many large oil exporting nations.6% of world population. with 64% of total global wealth estimated to be held in the rich continents of North America (34%) and Europe (30%). Similarly Europe is estimated to account for 30% of global wealth and 23% of world GDP or income. Lower middle income countries (US$1. The Middle East.3 shows the uneven distribution of world income from World Bank data on Gross National Income (GNI) per capita (i. yet has only 9. Figure 3. It is clear from Figure 3. the Middle East (such as Iraq). 4. The World Bank classifies countries into four categories in terms of GNI per capita: 1. North East Asia (such as Japan and Korea) and Australasia (such as Australia and New Zealand). The distribution of global wealth differs from the global distribution of income since it measures net assets rather than the current average annual income of citizens of countries.025) are predominantly found in Central and Southern Africa (such as Chad and Niger) and West and South Asia (such as Afghanistan and Cambodia). Central and South America (such as El Salvador and Bolivia) and Asia (such as India).036 to US$12. and Asia accounts for 52% of world population. United Nations University. The global distribution of wealth refers to a comparison of the ownership of net assets between countries and regions of the world. yet it accounts for 10% of the world’s population. yet accounts for only 5.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Figure 3.2% of world population.4 that the global distribution of wealth is more uneven than the global distribution of income. Northern and Southern Africa (such as Morocco and Sudan). Upper middle income countries (US$4.

and longer life expectancy. based on three human development indicators: GNI per capita. energy consumption and health services.7%.8 over 2005-10.2 in the low income countries in the same period. The standard of living in different countries is measured and compared in terms of real Gross National Income (GNI) per capita and a range of other material and non material indicators of development such as levels of adult literacy.6% in 2012. China.72 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Income and Quality of Life Indicators Large variations in the standard of living occur between countries on a global basis. and the very high human development countries having per capita incomes that averaged PPP US$33.8% of the adult population on average was literate in 2010 (see Table 3. This was significantly lower than the high human development countries with GNI per capita incomes averaging PPP US$11. Australia. High human development countries had an average annual growth rate of 0.2 include the high dependence of low human development countries on foreign aid and their high agricultural output to GDP ratio. 3. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . Low and medium development countries tend to have high population growth rates.501 in 2012. Other indicators in Table 3. compared to the high human development nations’ average of 7. In 2012 low human development countries had per capita incomes that averaged PPP US$1.9% in 2011-12. Uganda. whilst medium human development countries had higher average per capita incomes of PPP US$5. Egypt. Low human development countries (46 were listed in 2012) included Nigeria. Iraq. where agriculture is carried out. and just 0. Access to primary and secondary education in high and medium human development countries was relatively high compared to the low human development nations.428. but produce nearly 75% of world GDP. Italy. They also consume an average of 134 kilowatts (kw) of electricity per capita. Vietnam. The extent of urbanisation in high human development countries approached 77. the high human development countries tend to have lower birth and death rates.000 people in high income countries averaged 2. which measure the quality of life. Demographic indicators include particular population or human capital features of development. France. compared to high and medium human development countries. compared to an average of 1. In addition. Norway and Singapore. nutrition.2%.391. Tanzania. The growth in GDP per capita or income is an indicator of economic growth in a country. mean years of schooling and life expectancy: 1. Very high human development countries (47) and high human development countries (47) included Canada.2 are mainly from the United Nations Development Programme’s (UNDP) Human Development Report (HDR) 2013 which compared standards of living between countries in 2012. reflecting higher concentrations of population in rural areas. falling death rates. Germany. Zambia. A total of 94 countries were listed in this category in 2012. whereas the medium human development countries grew faster at 5. Ethiopia.2). The Human Development Report separated 187 countries into three categories. India. lower population growth and fertility rates. New Zealand. Indonesia. In contrast.518 kw per capita. Low and medium human development countries had higher rates of infant mortality in 2011 than the high human development countries. the United Kingdom.6%. high fertility rates and low life expectancy. Medium human development countries (47 were listed in 2012) included Thailand. high birth rates. whereas in medium and low human development countries it ranged from 43. the Philippines. Medium and low human development nations account for approximately 70% of global population yet only produce about 25% of the world’s GDP. Fiji. whilst the very high and high human development countries account for 30% of global population. Rwanda and Mozambique.633. and low human development countries grew by 3. 2. the USA. Cambodia and Bolivia.2 in the medium income countries. and higher levels of undernourishment.7% to 33. lower rates of adult literacy. where only 60. the number of doctors per 1. The development indicators in Table 3. GNI per capita is a basic indicator of economic development of a country as it measures the standard of living of residents in that country.

9% 29.) Doctors per 1.6% 43.5% 70.1% 2.2 0.0% 12% 29% *Life expectancy (years) 2012 80. Given the large range and differences in many of the development indicators presented in Table 3.948.1 2.9% Imports (% of GDP) 2011 23.0% 10. Although all three categories of countries had high percentages of GDP accounted for by exports and imports.0% 27.7m Fertility Rate (births/woman) 2012 1.173. Palgrave Macmillan.000 people (av.0% 60.520.0% *Adult Literacy Rate 2010 99. the UNDP calculated a Human Development Index (HDI) value for each of the 187 countries in the Human Development Report 2013 by measuring three variables considered to be crucial for human development or progress.6% 1.972b US$18.6% Inflation 2011 2.280.7% GDP 2011 US$b (av.2 6 46 95 Secondary Education 2010 90.5% Exports (% of GDP) 2011 24.1 71.5m 3. * The three HDI indicators Whilst domestic saving and investment levels are between 17% and 30% of GDP in both high and medium human development countries. 2005-10) Infant Mortality (per 1.0% 24.0% 32.7b US$1. Human Development Report 2013.0% 18.518 kw pc 1.095. 2000-10 0. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 73 .a.9% 19.9% Debt Service Ratio (% of GDP) 2011 4. World Development Indicators 2013. PPP 2005) US$48.9% 4.0% 26.2% 27.5b 2.1% Sources: United Nations Development Programme (2013).4% Agriculture/GDP (%) 2011 1.0% 82.8 1.3% 7.2% 27.2% Population Growth p.8% 2.7% 26.1% 10. Washington DC.6% 30.6 59.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Table 3. NY and World Bank (2013).428 US$1.) < 5.1% 4.6% Undernourishment 2011 (% of total pop.0% 80.633 GDP pc Annual Growth 2011-12 0.9% 5.2.146 kw pc 134 kw pc Total Population 2012 Urban Population 2012 (% of total pop.2% 77.3% 60. the low human development countries tended to have a greater import share of GDP because of a reliance on imports of energy. PPP) 2012 US$33.391-US$11.5m 1.4% Domestic Savings (% of GDP) 2011 17.501 US$5.8% 0.7% 8.0% Energy Consumption 2005 7.0% 0.000 births) 2011 Foreign Aid (% of GDP) 2010 Manufactures/Total Exports (%) 2010 Domestic Investment (% of GDP) 2011 19.0% 89.2: World Development Income and Quality of Life Indicators in 2011-12 Development Indicators Very High & High Human Medium Human Low Human Development Countries Development Countries Devel.7% 33. Countries *GNI per capita (av.1% 79.2% 3. there is a lower level of investment in the low human development category of countries.0% Primary Education 2010 95.2% 5.

7 years 7.688 Bottom Five Countries 183 Burkina Faso 55.921 5 Germany 80.699 102 Turkmenistan 65.9 years 1.74 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd The following three variables are considered by the UNDP to be fundamental to human progress: 1.340.304.3: The Top. and can be adjusted over time.3.782 0.1 years 1.712.938 3 United States 78.3 43.480 0.8 7. Adult literacy and educational attainment (measured in average years of schooling) 3.5 7.org NB: PPP is purchasing power parity in US$ which adjusts GNIs for variations in national prices and exchange rates.8 years 11.340 0.3 years 12.6 7.478 0.2 35. The 94 countries in the very high and high human development category had HDI values in 2012 ranging from 0.0 34.920 Selected Middle Five Countries 100 Jordan 73.688 0. Life expectancy at birth (measured in years) 2. The HDI is a more comprehensive measure of human development than GDP or GNI per capita. according to the three indicators used to calculate the HDI. the 47 countries in the medium human development category had HDI values between 0. an average of 12 years of schooling per person. and a HDI value of 0.1 years 5.945 0.0 years 12.undp.5 years 8. The top five.3 1. 48.697 and 0.2 906 0. Table 3.9 7. Australia ranked second in 2012 (up from fourth in 2006) with 82.7 years 13.690 104 Maldives 77.722 0. whilst the low human development category of 46 countries had HDI values ranging between 0.7 years 3. a GNI per capita of PPP US$34. Rep.937 4 Netherlands 80.431 0.955 to 0.698 103 Thailand 74.258 0. a selected middle five and the bottom five countries in terms of HDI rankings for 2012 are listed in Table 3.938.282 0.9 years 1.4 701 0.6 37.6 48.955 2 Australia 82.5 319 0. Changes in HDI ranks over time show the progress made by countries in each indicator and in overall human development.534 and 0.327 186 Congo Dem. Human Development Report 2013. countries are ranked by the UNDP according to their human development achievements.340 185 Mozambique 50.3 years 6.7 years 1. measured in 2005 PPP US dollars Once the Human Development Index is calculated. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .6 years 12.5 1.304 Source: United Nations Development Programme (2013).202 0.272 0. Real Gross National Income (GNI) per capita. Middle and Bottom Five Countries in the UN’s 2012 HDI Rankings HDI Rank Top Five Life Expectancy Countries Mean Years of Schooling Real GNI pc (PPP US$) HDI Value 1 Norway 81.0 years for life expectancy. www.700 101 China 73.6 5.304 186 Niger 55.343 184 Chad 49.536.2 years 9.

3 and account for the differences in HDI rankings between the top five countries. 3. 5. Figure 3. How does the UNDP calculate the Human Development Index? Refer to Table 3. Explain the difference between the processes of economic growth and economic development. This is measured by mean years and expected years of schooling. Define the following terms and add them to a glossary: economic development economic growth global distribution of income global distribution of wealth © Tim Riley Publications Pty Ltd GNI per capita Human Development Index human development indicators infrastructure life expectancy literacy poverty quality of life Year 12 Economics 2014 75 . an education index and a GNI index. This progress can be measured using changes in the HDI over time to ascertain if citizens in medium and low income countries are improving their opportunities to achieve the following: • Leading a long and healthy life as measured by changes in life expectancy. 6. Human Development Report 2010. NY. Refer to Table 3. 2. REVIEW QUESTIONS THE DIFFERENCES BETWEEN ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT 1. Palgrave Macmillan. Discuss the extent of poverty amongst regions that make up the world economy. Refer to Figure 3. 4.2 and the text and contrast the standard of living in very high and high. • Enjoying a decent standard of living through earning higher per capita incomes as measured by rising levels of GNI per capita over time. Refer to Figure 3. 7.3 and describe the distribution of world income in 2011. • Acquiring knowledge and skills through higher rates of adult literacy and enrolment ratios in schools. colleges and universities.5 shows a summary of how the HDI is calculated according to changes in a life expectancy index.5: Calculation of the Human Development Index United Nations Development Programme (2010). medium and low human development countries.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Figure 3. a selected middle five countries and the bottom five countries in 2012.4 and describe the distribution of global wealth in 2010. The World Bank and UNDP believe that progress in economic development should lead to progress in human development within countries and regions.

2. and a general rise in living standards. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . Malawi. emerging economies have increased their contribution to world output and trade and are undergoing rapid economic development. Chad. 1. However as developing and emerging economies have become more open to trade. Developing economies are also known as low income economies since their levels of per capita income range from US$1. In total the major emerging economies accounted for around 30% of world output and about 20% of world trade in 2012. rose from 18% in 1990 to 30% in 2008. Turkey. Malawi and Bolivia. Liberia. poor levels of governance and stability. 3.035 according to the World Bank.476. Mexico. This has led to a significant reduction in poverty through rising per capita incomes. India and China (the BRICs). However the success of the BRICs and other emerging economies in sustaining high rates of growth and development has not been matched by many other developing economies such as Albania. the NIEs (Korea.036 to US$12. Washington DC. Chad. This is why the BRICs are classified as major emerging economies. Norway and Sweden). World Development Indicators 2010.025 or less to a high of US$4. The increasing share of export revenues to low and middle income economies’ GDPs is shown in Figure 3. Middle and High Income Economies Source: World Bank. Mali and Niger characterised by per capita incomes that are less than US$1. Bangladesh. Canada.76 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd DEVELOPING. India and China (the BRICs) have become very dominant by sustaining higher rates of growth than the advanced economies (35 in total) such as the USA. Euro Area (17 countries). Whilst there is some link between increased global economic integration. but amongst the very high income or major advanced economies the average per capita income is US$33. Russia. Emerging economies or high or upper middle income economies have per capita incomes ranging from US$4. Figure 3. New Zealand. The major advanced economies include the USA. Nigeria and South Africa and oil exporting countries in the Middle East such as Saudi Arabia. the UK. Major emerging economies include Brazil. increased trade and a reduction in poverty. Advanced economies have per capita incomes over US$12. Pakistan. their exports as a percentage of their GDPs. making them the dominant group in the global economy. Kuwait and the UAE. countries in the Euro Area. (2010). Most of the poorest developing economies are located in Sub Saharan Africa with countries such as Togo. this has not occurred in many developing countries.6: Export Shares of GDP for Low. Within this group of economies. and high trade barriers faced in accessing export markets in emerging and advanced economies. Hong Kong SAR and Singapore) and other advanced economies (such as Australia.500.6. The 35 advanced economies accounted for 50. As a group. EMERGING AND ADVANCED ECONOMIES A major change in the global economy has been the rising importance of developing and emerging economies (153 in total) in their contribution to world output and world trade. Cambodia. Japan and the NIEs.475.2% of world exports in 2012. Egypt. Japan. Congo. Russia. Zambia.391. the major emerging economies of Brazil. Guinea. increased access to education and health care. The reasons appear to be a lack of resources.1% of world output and 61. Taiwan.

This may be sourced from the use of labour intensive and traditional methods of agriculture and manufacturing.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development The Reasons for Differences in Economic Development between Nations There is a large contrast in the levels of economic development achieved by advanced countries such as the USA and Australia. This contrast in the level of economic development between the three groups of countries is often referred to as the ‘development gap’ since the distinguishing features of many emerging and developing countries are low per capita incomes. India. Therefore many emerging and developing countries experience difficulties in achieving high levels of productivity and economic growth relative to advanced countries.7. low levels of saving. Cambodia and Ethiopia. Some of the main reasons for the differences in the level of economic development between advanced and emerging and developing countries are as follows: • Low per capita incomes in emerging and developing countries reduce standards of living relative to advanced countries and increase the extent of income poverty. whereas advanced countries are characterised by high real per capita incomes and high levels of saving. • A lack of infrastructure and capital formation can retard economic growth and development in emerging and developing countries by preventing the formation of markets. South and Central America. • Low levels of technological progress and labour productivity can lead to low rates of economic growth being achieved in many emerging and developing countries. Poorly developed capital markets can discourage saving. • Low levels of saving in many emerging and developing countries result from low per capita incomes and widespread rural poverty and indebtedness. Russia. and the efficient use of labour and capital resources. and developing countries such as Pakistan. Hong Kong SAR. capital formation and economic growth. Low per capita incomes reduce the ability to save and invest and the supply of capital for capital widening and deepening to promote economic development. They have also increased their rates of domestic saving and investment. Africa. The advanced countries are mainly located in the northern hemisphere (except for Australia and New Zealand) in the continents of Europe.7: The Vicious Cycle of Poverty Low per capita incomes Low levels of productivity Low levels of saving Low levels of investment and rates of capital accumulation © Tim Riley Publications Pty Ltd Year 12 Economics 2014 77 . This can lead to high rates of unemployment and underemployment. as does the ‘conspicuous consumption’ of Western luxury consumer goods. and emerging countries such as China and India. Governments in emerging and developing countries can also reduce savings by running large budget deficits and funding these deficits through external debt borrowings which can lead to high debt servicing costs. The development gap leads to significant contrasts in living standards between advanced countries and emerging and developing countries. and China are closing this gap quickly by sustaining higher rates of economic growth. rising per capita incomes and large reductions in poverty. Korea and Taiwan). capital formation and economic growth. Figure 3. investment. However large emerging countries such as Brazil. The majority of emerging and developing countries are located in the southern hemisphere and are largely confined to the continents of Asia. and may become trapped in a self perpetuating vicious cycle of poverty as illustrated in Figure 3. investment. North America and parts of North East Asia (such as Japan. The income gap between the advanced and emerging and developing countries is therefore often referred to as the ‘North-South Divide’.

There have been several other effects of globalisation on world economic development: • An international convergence of economic systems as more countries adopt market capitalism and democracy as the preferred types of economic system and government or political system. The ‘globalisers’ also grew faster than the developed or advanced countries and closed the income gap between them. such as corrupt and inefficient governments. the NIEs and ASEAN. power. This creates extra demands on public resources and services. If population growth outstrips economic growth in an emerging or developing country. Globalisation has had its most profound effect on East Asian economies including China. living standards can fall. where increased trade and economic development has led to a large reduction in world poverty and an improvement in the HDIs of these countries over time. This required global policy co-ordination by the G20 and the reform of global financial architecture. trade and financial flows and flows of portfolio and direct foreign investment up until the Global Financial Crisis in 2008-09. and a high dependence on imports of energy and capital. This integration led to increased growth in world GDP. housing. which can lead to political instability. These trends are shown in Figure 3. Such ghettos are prone to natural disasters such as floods and mud slides. alongside a less formal or traditional rural economy. • Economic dualism is a common feature of many emerging and developing countries which have a colonial legacy: an urban elite in a formal commercial economy. such as China. housing and employment. health. A study of 72 countries by the World Bank in 2001 found that the ‘globalisers’ or countries which increased their ratio of trade to GDP grew almost four times faster than those that did not (i. This has resulted from reductions in trade barriers and greater financial market liberalisation. Economic growth and progress in human development will fall if inflation reduces real incomes and misallocates resources. The globalising economies. Traditional cultures and institutions in many emerging and developing countries can also impede the adoption of new technologies and management techniques which are needed to sustain higher rates of economic growth and development. dominated by subsistence agriculture and the use of barter for market exchange. Unable to find jobs. India. increasing the incidence of poverty and retarding economic development. which can cause a major loss of life and increased poverty.4% per year for ‘non globalising’ countries. Persistent current account deficits are often recorded by many emerging and developing countries because of their reliance on agriculture and labour intensive manufactured exports. employment and transport services. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .78 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd • High population growth rates in many emerging and developing countries leads to high dependency ratios and increases the demand for education. Large shanty towns exist in cities such as Calcutta. This can undermine flows of inbound foreign investment needed to support and finance the process of economic development. • Institutional problems can affect many emerging and developing countries.8. ‘non globalisers’). by achieving higher rates of economic growth and development. they live in poverty in shanty towns with inadequate water. • The ‘demonstration effect’ is a major problem in many emerging and developing countries caused by rural peasants migrating to cities in search of employment. Mexico City and Rio de Janeiro. health. sanitation. THE EFFECTS OF GLOBALISATION ON ECONOMIC DEVELOPMENT The globalisation of world economic activity refers to the greater levels of integration between the world’s economies. Malaysia. • Lack of foreign exchange and high levels of foreign debt in many emerging and developing countries may lead to high debt servicing costs.e. education. Brazil and Mexico grew on average by 5% in the 1990s compared to an average of 1. civil wars and disorder. • The increased risk of ‘financial contagion’ as financial crises can be transmitted quickly from one economy or region to another as was evident by the Global Financial Crisis in 2008-09. • Demand inflation can arise in many emerging and developing countries if the volume of domestic production does not satisfy the economy’s level of aggregate demand.

However the most notable reversals in HDIs occurred in Sub Saharan Africa. 3 in the Arab States. Since 1990 twenty countries have suffered a reversal in their HDIs according to the World Bank (2004).9) failing to make progress in human development: 21 in Sub Saharan Africa. Keeping the Gains. © Tim Riley Publications Pty Ltd In 2004 20 countries experienced reversals in their HDIs. with 13 in Sub Saharan Africa.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Figure 3. Between 1975 and 2002 improvements in HDIs occurred mainly in the high income OECD countries and East Asia and the Pacific. Economic Analytical Unit. Human Development Report 2004. and Latin America and the Caribbean. Figure 3. This was due to sustained economic growth and rising real incomes being translated into improvements in human development.9.9: Top and High Priority Countries in Raising HDIs Source: UNDP (2004). Canberra. However setbacks in HDI progress occurred in Central and Eastern Europe and the Commonwealth of Independent States (CIS). Oxford University Press. where many countries do not experience substantial economic growth or development at all. the Arab States and South Asia. Globalisation. Year 12 Economics 2014 79 . The UNDP identified 27 top priority countries (shown in Figure 3. ‘Globalisers’ and ‘Non Globalisers’ Source: DFAT (2003). where countries are making the transition to market capitalism. There was also some improvement in HDIs for Latin America and the Caribbean. The other reversals were in countries in the CIS which experienced a fall in per capita incomes and human development in the 1980s due to high rates of structural change and restructuring in industry.8: Growth Rates of Developed Countries. Global disparities in the HDI are shown in Figure 3. and one each in East Asia and the Pacific. Despite the positive impact of globalisation on some countries. it has tended overall to reinforce the existing income disparities between advanced and emerging and developing countries. South Asia. Much of this reflected the impact of the HIV/AIDS epidemic on life expectancy.

membership of the WTO.10). with one third of all manufactures traded in the 2000s involving trade in parts and components. Underpinning much of the growth in world trade has been the liberalisation of trade regimes by developing countries through bilateral and regional trade agreements. Thailand. Some of the major emerging and developing host economies receiving FDI include China. mining.2 trillion in 2010 with the share going to developing and transition economies expected to increase relative to the advanced economies.80 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Global Trade. The major sectors in receipt of FDI by MNCs in emerging and developing countries include the primary (e. Malaysia.1 trillion (refer to Figure 3. FDI flows from BRIC countries reached a value of US$147b in 2008 and accounted for around 9% of world outflows of FDI. South Africa and Peru. gas. Brazil. petroleum and timber).6% per annum but the emerging and developing economies increased their exports by 9. Investment and Transnational Corporations World trade in goods and services grew by an average of 8% per anum between 2003 and 2008 as the global resources boom led to strong demand for commodities and resources. and participation in the Doha Round of multilateral trade talks. along with services trade. finance and business) sectors. leading to intra-industry trade. has created a web of global production facilities which connect subsidiaries of transnational or multinational firms. services and intellectual property.g. machinery and motor vehicles) and service (e. construction.10: Foreign Direct Investment by Groups of Economies 1980-2009 (US$b) Source: UNCTAD (2010). The exports of the advanced economies grew by 5. However in 2009 world trade contracted by 12% because of the impact of the Global Financial Crisis. Russia. Government policies of ‘going global’ have supported domestic BRIC enterprises investing on a global basis to sustain growth. Another major recent trend has been the growing amount of FDI outflows from Brazil. chemicals. electricity. metals. This type of trade. communications. Mexico. extensive natural resources and fast growing local markets due to the rising middle class. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . World Investment Report 2010. transport. Compositional shifts in world trade have occurred with more trade in ETMs (high technology goods). India. Trade in component parts is one example of this changing trade pattern. Russia. water. FDI flows were forecast to recover to US$1. Vietnam. However the Global Financial Crisis led to a 16% decline in FDI flows in 2009 and they fell to US$1. assisted by strong growth in China and East Asia.7% per annum in the same period. agriculture. Figure 3. India and China (the BRICs) by MNCs from BRIC countries seeking to secure resources and investment projects in other countries. Many of the largest multinational corporations (MNCs) have sales that exceed the value of the GDPs of a number of emerging and developing nations.g. This reflects the trend towards growing MNC interest in investing in developing and emerging economies because of potentially higher returns on investment funds due to cheaper labour costs. World trade volumes recovered in 2010 and grew by around 12%. Indonesia. Global foreign direct investment (FDI) flows grew strongly between 2003 and 2007 reaching a total of US$2 trillion in 2008.g. manufacturing (e.

agriculture (13. The issue of global climate change is high on the agenda of global efforts to negotiate a new Kyoto Protocol after the former agreement lapsed in 2012. Since the Rio Earth Summit in 1992. whaling and oil spills • Economic Exclusion Zones • UN Convention on the Law of the Sea • Antarctic Treaty However major disagreements have arisen between advanced and developing countries over the signing of the Kyoto Protocol and the acceptance of emission targets for greenhouse gases. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 81 . ozone depletion. Developing countries have pursued economic development but often at the cost of environmental quality.2%). land use change such as deforestation (18. sustaining economic growth and preserving world ecosystems. The Stern Report in 2006 recommended the development of a global carbon trading scheme to reduce global emissions. These environmental problems have worsened as global economic activity increases. There is a growing awareness amongst advanced.11. as they expand agricultural production. These emissions are mainly carbon dioxide (77%).5%) and waste disposal (3. desertification. These include energy related processes (64.6%). nitrous oxide (8%) and fluorinated gases (1%) as shown in Figure 3. The Earth Summit held in 2002 in Johannesburg addressed some of these global environmental problems. The average global temperature is predicted to rise by 3. persistent organic pollutants and the environmental health of the seas and sea bed (including acidification) are some of the key issues relating to the global commons or natural environments. The sources of greenhouse gas emissions in Figure 3. by causing large scale deforestation and desertification.7%). deforestation. • Montreal Protocol 1987 on CFC emissions melting glaciers and shrinking ice sheets • Kyoto Protocol 1998 on greenhouse gas emissions • Threats to biodiversity through land clearing. Trade in Endangered Species • Over fishing and exploitation of marine resources through illegal fishing. and overpopulation puts pressure on natural resources.11 underline the scope of the problem as most human activities burn fossil fuels and generate greenhouse gases. The most recent and reliable scientific evidence on climate change. Table 3. substantial co-operation between countries on environmental matters has occurred. Advanced countries have created many of the global environmental problems that exist through their high levels of carbon dioxide emissions caused by industrial pollution and high levels of energy consumption. indicated that the rate of global warming has been nearly twice as fast in the last 50 years as in the last 100 years. Climate change poses risks for the global environment and economic development. with over 130 environmental treaties signed on issues such as climate change and biodiversity (refer to Table 3. undertaken by the Intergovernmental Panel on Climate Change or IPCC (2007). a rising sea level.4).4 : Responses to Global Environmental Issues and Problems Environmental Issue or Problem Global Policy Responses • Climate change including greenhouse gas • UN Framework Convention on Climate Change emissions. Increasing rates of industrialisation and urbanisation in the emerging and developing world have also led to higher levels of pollution and greenhouse gases.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Global Environmental Sustainability Climate change (caused by greenhouse warming and ozone depletion).5 degrees Celsius between 2000 and 2100 if global measures are not taken to reduce the level of greenhouse gas emissions. with greater risks for people in developing economies who have the least resources to adapt to its impacts. emerging and developing countries that global strategies and solutions are required to address these environmental concerns for the benefit of current and future generations. • UN Convention on Biodiversity expansion of agriculture and illegal hunting • Convention on Int. Therefore climate change is an environmental issue with implications for the reduction of poverty. the loss of biodiversity. methane (14%).

trade and investment accounted for by the rich advanced countries such as the USA. Japan and other advanced economies (such as the NIEs). p123.7% Land use change 18. China and India in this period. Putting a price on carbon emissions and establishing targets for their reduction. South Africa. Carbon pollution reduction targets were negotiated at the UN Framework Convention on Climate Change (UNFCCC) in December 2009 in Copenhagen. Fostering international co-operation through a new Kyoto Protocol Agreement which has targets. India and East Asia. Euro Area and Japan was also reasonably strong in this period. advanced.82 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Figure 3. and is led by major polluting advanced countries. World Bank Washington DC.11: Greenhouse Gas Emissions by Sector and Activity Sector Energy related and industrial processes 64. Between 2006 and 2007 world growth averaged around 5% per annum (refer to Table 3. World Development Indicators 2008. India and other emerging countries contributing to strong world growth. Europe and East Asia. emerging and developing economies between 2007 and 2012 with forecasts for 2013-14.9% Waste 3. Growth in the USA.3% Greenhouse gas Carbon dioxide 77% Buildings 15. leading to a strengthening of world trade and investment flows between the regions of North America. It also shows growth rates for major advanced and emerging economies such as the USA. which will encourage developing countries to adopt similar policies to reduce their greenhouse gases. 3. 2.3% Agriculture 13.8% Deforestation 18. Euro Area. However there was widespread disagreement between advanced and major emerging and developing countries over the size and timetable for the implementation of carbon pollution reduction targets under a new Kyoto Protocol agreement. iron ore. largely sourced from China’s large demand for resources such as coal. However loan defaults in the US sub prime mortgage market developed into a global credit crisis in late 2008. Russia India and China. The International Business Cycle Changes in the international business cycle have major implications for economic growth and development in all countries and major regions of the world economy.5) because of a global resources boom sourced from China. Table 3. rather than from the OECD countries alone. Brazil. The UNDP’s Human Development Report 2007-08 outlined three major strategies for dealing with climate change and reducing greenhouse gas emissions: 1. resulting in a higher cost of credit. Euro Area.5 shows the growth in GDP for the world economy. world output is more balanced and sourced from the three main regions of North America.6% Methane 14% Nitrous oxide 8% Fluorinated gases 1% Source: World Bank (2008). Changing people’s behaviour by moving to low carbon technologies and cleaner energy sources. However with the rise in economic power of large emerging economies such as Brazil.6% Landfills & other waste disposal 3.3% Transport 13. Europe and East Asia. changes in the US and EU business cycles can affect the international business cycle and be transmitted to other countries and regions such as China. the Russian Federation and OPEC nations benefited from this boom. Changes in world demand will affect the growth in world output. With the majority of world output.2% End use/activity Industry and mining 34. Japan. metals and petroleum. Resource exporting countries like Australia.5% Agriculture and livestock 14. trade and investment flows. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . World commodity prices peaked in mid 2008 as the global resources boom reached its height.

In 2009 the world economy contracted by -0.5% 4.7% 4.2% 9.8% 6.2% 10.0% 11. and together with large budget deficits and high levels of public debt in major advanced economies led to a slowdown in the global recovery.4% 2.9% 2. and the USA and other major advanced economies started to experience a deceleration in their rates of growth.6%. A Global Financial Crisis (GFC) occurred in 2008-09 and exposed the problem of ‘financial contagion’ between countries and regions as a result of increased economic integration and a lack of regulatory oversight of the global financial system.0% Advanced Economies 2.3% -3.4% -0. 2.0% 3. 4.1% 6.6% 2.2% -2. List the features of advanced. REVIEW QUESTIONS DEVELOPING.9% 2. 5.0% 1. April.2% 4.5%.0% 0.0% 1.5: World GDP Growth 2007-2014 (f) (%r per annum) 2007 2008 2009 2010 2011 2012 2013 (f) 2014 (f) World 5.2% 1.8% 2. The resulting global recession led to lower industrial output and a sharp contraction in world trade and investment in advanced. with the advanced economies contracting by -3.3% 5.6% 9.9% 3.7% 7.3% 4.4% 5.3% 7. Discuss the impact of the Global Financial Crisis in 2008-09 and the European Sovereign Debt Crisis in 2011-12 on economic growth in major advanced and emerging economies.5% 1.0% -5.2% India 10. 8.7% -0.2% 2.6% China 14. Discuss the impact of globalisation on global environmental sustainability.4% Other Advanced Ecs.2% 5.4% -4.9% -0.1% 2. A global recovery began in 2010 but the Sovereign Debt Crisis in the Euro Area worsened in 2011-12.0% 5. 6. emerging and developing economies.6% 1. Discuss the problems involved in the negotiation of a new Kyoto Protocol agreement. Higher oil prices also increased world inflation.5% 3. emerging and developing countries. Discuss the link between world trade.0% 8.4% 1. World Economic Outlook 2013.6% 1.4% 2.7% 6.7% Source: IMF (2013).1% -3.4% 1.2% Emerging and Developing Economies 8.2% United States 1. NB: (f) IMF forecasts for 2013 and 2014.1% 4.2% 7.2% -1.8% -0. foreign direct investment and multinational corporations.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Table 3.1% 5. Discuss the regions targeted by the UNDP as suffering a reversal in their HDIs in recent times.6% 5.0% Euro Area 3.0% 1.6% 6. EMERGING AND ADVANCED ECONOMIES 1.3% 1. Discuss the reasons for the differences in economic development between nations.8% 0. 4.4% 9. 3.2% 3.1% 2. and China and India slowing but still recording positive growth. Contrast the economic performance of countries that are ‘globalisers’ with those that are ‘non globalisers’.8% 8. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 83 .1% Japan 2.2% 1. Slower growth in the advanced economies was transmitted to the economies of China and India which also experienced lower growth.8% 0.6% -0. 7.

These SEZs attracted foreign investment and MNCs through a range of incentives such as low tax rates. implemented a range of radical economic reforms between 1978 and 1997. also introduced a ‘one child policy’ to contain China’s population growth as part of the broad based reform process: • Agricultural reforms between 1978 and 1994 involved the abandonment of the commune system of agriculture (de-collectivisation) and its replacement by the Household Responsibility System. to develop a system of network banking. This has resulted in sustained increases in per capita income. transfers of Western technology and management skills. China’s Economic Reform Strategy After Mao Tse Tung’s death in 1978. China has been the fastest growing economy in the world for the past two decades by sustaining an average rate of growth in real GDP of around 10% per annum. improvements in living standards and a reduction in poverty in China. • In 1994 taxation reforms were introduced by the Chinese government. establish stock exchanges. Trade in exports and imports grew from 10% of China’s GNP in 1978 to 36% of GNP by 1996. • Banking laws were introduced in 1995. Under Mao’s Tse Tung’s Communist rule. This helped to raise industrial output. his successor. In PPP US$ terms it became the world’s second largest economy after the USA in 2005. China has a socialist economy ruled by a Communist government. • In 1992 cuts to tariffs and other forms of protection were used to encourage greater domestic efficiency through direct import competition. Inflows of foreign capital increased China’s access to export markets. based on rapid industrialisation and sustaining high rates of economic growth. and less stringent government regulations. • In 1980 an ‘open door policy’ was adopted towards foreign trade and investment. China attempted to modernise agriculture and industry in the Great Leap Forward in the 1950s. China has made rapid progress in economic and human development by reforming its economy to become more ‘market driven’ or capitalist in orientation. Chairman of the Chinese Communist Party. designed to improve China’s economic performance. In the ensuing Cultural Revolution of the 1960s. Deng Xiao Ping. and promote a more efficient capital market to facilitate saving and investment in China. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . This new system led to dramatic increases in food production and surplus income was invested in privately run town and village enterprises (TVEs) responsible for the light manufacturing of industrial goods. These cuts in import protection supported China’s drive to attract foreign investment and open its domestic market to more foreign competition. China’s average tariff rate was cut from 32% to 19% in 1996 and reduced to 15% in 2000. which was formed after Mao Tse Tung’s Communist forces defeated the Nationalists under Chiang Kai Shek in the Chinese civil war of 1949. cheap labour and power. and created substantial employment in China’s manufacturing sector. in order to improve the efficiency of tax collection and to finance public infrastructure spending.84 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd CASE STUDY OF THE INFLUENCE OF GLOBALISATION ON CHINA China is currently the world’s second largest economy in nominal US dollar terms and the largest country in terms of population size with 1. exemption from import duties. This meant that households could make their own production decisions and sell surplus output in free markets once the state quota was met. progress towards modernisation under socialist planning was further retarded by purges of reformers and progressives critical of Mao’s failed economic strategy and China’s isolation from the global economy. It has also become very integrated into the global economy through international trade and foreign investment. These reforms also targeted tax evasion and avoidance. These reforms shifted the power to collect taxes away from provincial governments to the central government in Beijing. with Special Economic Zones (SEZs) established in the southern and eastern coastal provinces of China.3b people. In 1979 Deng Xiao Ping. which were major problems encountered in raising sufficient taxation revenue to meet the central government’s spending commitments. This policy failed to raise national output and resulted in widespread famine and poverty.

020 Real GDP PPP (US$b) 7.9%.au.8 8. Foreign investment funds are used to finance export industries.6 4.4 2.4 9. Its economy has been transformed in four main ways: 1.0 Sources: IMF (2013).9 4. China has followed a similar path to industrialisation to Japan and the NIEs. but fell to 9.9 -0.2 10.4%.330 8.3 5. China has moved from being a planned or socialist economy to a market or capitalist economy.30 6.2% between 1995 and 2004. China has moved from being an agricultural economy to an industrialised economy. On a purchasing power parity (PPP) basis it is also the second largest economy in the world after the USA. 3.623 Real GDP (% growth per annum) 14.930 7.35 Nominal GDP (US$b) 3.52 6. Chinese growth was a modest 7.33 1. enabling China to achieve a large current account surplus which was 2. to one with a trade oriented focus. The IMF forecast a modest 8% growth rate for China in 2013.1 4.128 11. Investment spending was 45% of GDP in 2006.6 2.6: Selected Economic Indicators for China 2007 to 2013 (f) 2007 2008 2009 2010 2011 2012 2013 (f) Population (billions) 1.dfat.3 6. The Chinese government responded to the GFC by implementing a US$586b fiscal stimulus package in November 2008 to maintain a growth target of 8% in 2009-10.3 5.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Economic Growth China sustained a high rate of average annual growth in real GDP of 9. China also has substantial political and military power. contributing substantially to global output. 2. based on ‘driving’ growth through foreign investment and international trade.405 13.2 5. The Chinese economy recovered in 2010 growing by 10.0 10.214 9.0 2.8% in 2012 as world recovery slowed due to fiscal restraint in the USA and Euro Area.2% in 2007 (refer to Table 3.3 6.1 Inflation (CPI % growth pa) 4.494 4.2% in 2009 due to the impact of the Global Financial Crisis (GFC) on China’s exports and inflows of foreign investment.3% in 2011 as natural disasters in Japan and the worsening of the European Sovereign Debt Crisis impacted on China’s exports.34 1.33 1. The stimulus package included infrastructure projects to rebalance growth from exports to increasing domestic consumption and investment.305 12. China has large foreign currency reserves which were US$3. China has become the second largest economy in the world as measured by the nominal value of GDP in US dollars.0 Unemployment (urban % pa) 5.6 9.322 8. including private and public spending on infrastructure. Table 3. economic growth. Globalisation has had a profound impact on China with economic growth being sustained between 8% and 10% in the 1990s and 2000s.5%. The main drivers of growth were business investment and net exports.3 4.7 3.7 6.33 1. and a rural based peasant society to an urban based society with a rising middle class.6% of GDP in 2012.34 1.8 2. its share of world exports of goods and services was 10%.gov. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 85 .2 4.official (% June) 6. highly integrated with the global economy to capture the benefits of globalisation.1 5.990 5.4 5.7 3.5 6.2 9. China has moved from being an economy with a domestic focus.10 Interest Rates .520 4.227 9.83 5.6 Current Account (% of GDP) Exchange Rate (RMB/US$) 7.6) but slowed to 9.54 6. Fact Sheet on China www.8 5.83 6.443b in 2013 and it is a net lender of capital to the rest of the world. World Economic Outlook. The growth rate peaked at 14. China is a major world economic power.45 6.33 1. and its share of world population was 19. April and DFAT (2013). trade and investment. 4.3 4.1 9.3 7. In 2012 China’s share of global GDP was estimated at 14.049 10.

990.7: Selected Indicators of China’s Economic Development (*HDI Indicators) Population 2012 (millions) *GDP US$b 2012 1.227. China’s economy doubled in size in the decades of the 1980s and 1990s. Palgrave Macmillan.25 a day) 2008 13.gov. China has experienced a substantial reduction in poverty. The World Bank estimates that over the last 25 years poverty has been reduced by 400 million people in China. Washington DC. World Development Indicators 2013.dfat. 1990s and 2000s has been based on an export oriented strategy financed by direct foreign investment.0b Annual Growth in GDP pc (%) 1995-2004 9.0m US$8. Table 3. World Bank (2013).660m Exports of Goods and Services as a % of GDP 2011 31% Manufactures as a % of Merchandise Exports 2011 93% Imports of Goods and Services 2011 (US$) US$1. (2013).1% Human Development Index Value 2012 0. China’s rapid rate of economic growth in the 1980s.8 *Life Expectancy at Birth 2012 (years) 73. Fact Sheet on China www.7b *Adult Literacy 2005-2011 (%) 94% Doctors per 1. falling by 130 million. previously living on one US dollar per day.au.760m Imports of Goods and Services as a % of GDP 2011 Net Direct Foreign Investment Flows 2011 (US$) Current Account Balance 2012 (US$b) 27% US$280.7 provides a summary of some of the major material and non material indicators of China’s progress in economic development.699 Human Development Rank 2012 (out of 187 countries) 101st Sources: UNDP.072m US$213.076 GDP pc PPP US$ 2012 US$9.86 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Economic Development With rapid economic growth of about 8% in average real terms per annum over the last few decades.162 Annual Rate of Inflation (%) 2012 2. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .7 years Population Below Poverty Line (of US$1. New York. This has resulted in rising real incomes and significant improvements in material indicators (such as real GDP per capita) and non material indicators of development (such as life expectancy and literacy) for much of the Chinese population.7% Agriculture as a % of GDP 2011 10% Industry as a % of GDP 2011 47% Services as a % of GDP 2011 43% Exports of Goods and Services 2011 (US$) US$1.2% GDP pc (US$) 2012 US$6. Human Development Report 2013. Between 1990 and 2001 the reduction in income poverty in China was most rapid.354. with the incidence of people living below the international poverty line of US$1 a day.000 people 2006-2011 1.808. Table 3.

13. Human Development Report 2013. Figure 3.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Income and Quality of Life Indicators Table 3.5 years US$7. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 87 . New York.1% of the population in 2008 was classified by the World Bank as being below the international poverty line of US$1.12. the mean years of schooling and Gross National Income (GNI) per capita. Table 3. China’s HDI value rose from 0.699 in 2012 as illustrated in Table 3. Life expectancy in China rose from 63. Table 3.2% between 1975 and 2012 to reach US$7.687 0.9: Trends in China’s Human Development Index from 1980 to 2012 1980 1990 1995 2000 2005 2010 2011 2012 0. In 2012 China was ranked 101st out of 187 countries in the UNDP’S HDI list.2 years in 1975 to 73.7 years 7.8% below an income of US$2 per day. and GNI per capita (in PPP US$ terms) grew by an annual average of 8.699 Source: UNDP (2013).945 0. Palgrave Macmillan. with large flows of migrants from inland provinces with low HDI values to coastal provinces with the highest HDIs and income and employment opportunities. China’s annual HDI growth was 1. This partially explains the migration of people in China shown in Figure 3. Palgrave Macmillan.567 0.663 0.8 illustrates China’s progress in the three indicators that comprise the UNDP’s Human Development Index (HDI): life expectancy at birth. Human Development Report 2009.368 in 1980 to 0.460 0.518 0. The mean years of schooling and adult literacy (94% in 2011) also rose.699 Source: UNDP (2013). New York. With such improvements in economic and human development.9. Palgrave Macmillan. Human Development Report 2013.12: Inter-Provincial Migration Flows in China 1995-2000 Source: UNDP (2009).368 0.8: China’s HDI Indicators in 2012 Life Expectancy at Birth Mean Years of GNI per capita HDI Schooling (PPP US$) 73.616 0.25 per day and 29.945 in 2012. Despite the improvements in human and economic development in China in recent decades.4% between 2000 and 2012.7 years in 2012. New York.

Large geographic disparities in the distribution of income remain across provinces. Oxford University Press. compared to the western provinces. As a result. For example. p62. trade and exports. Per capita incomes are higher in the southern coastal provinces of China compared to the north. New York. In 1999 China’s three richest cities. compared to the rural areas in the north and west of the country. Tianjin. Figure 3. only some parts of China will achieve the Millennium Development Goals by 2015. Beijing and Tianjin were at the top of the HDI rankings and those at the bottom were all western provinces. Human Development Report 2003.88 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Distribution of Income China’s impressive growth performance has not benefited all of its provinces equally. with annual growth averaging 13%. Coastal areas have consistently experienced the fastest economic growth and rising incomes because of their proximity to the Special Economic Zones such as Beijing. leaving behind the vast inland areas of the western provinces which the Chinese government has targeted with large scale development projects to lift per capita incomes. Shanghai. Moreover the performance of coastal areas sped up in the 1990s.13 shows the dispersion in GDP per capita levels across Chinese administrative units in 2000. education and health. The wealth of coastal areas with large ports and harbour cities is derived from industry. Moreover the poorest provinces had the greatest inequality. the bulk of national income is concentrated in metropolitan and coastal regions. which was five times the level in China’s slowest growing north western regions such as Tibet and Xinjiang. where employment and income opportunities are greatest. and 2. Per capita incomes are higher in urban areas in the east and south of China. a trend that reflects the differences between urban and rural areas. and in the eastern coastal provinces. Guangzhou. Tibet had the lowest values for educational attainment and life expectancy. These differences exist on two bases: 1. Figure 3. In income. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . China is one of the few countries in the world performing well overall in the indicators for the UN’s Millennium Development Goals. China has shown large disparities in economic and social outcomes between coastal and inland regions.13: Geographic Distribution of Income in China in 2000 Tianjin Shanghai Hong Kong Source: UNDP (2003). Shanghai and Shenzen. Yet in recent decades.

the Chinese government revalued the RMB and adopted a managed peg arrangement for its exchange rate but there is growing international pressure for China to adopt a floating exchange rate mechanism.1 195. However a slowdown occurred in 2011-12 with a fall in exports due to the impact of the European Sovereign Debt Crisis on world growth. China’s export success has also been assisted by an undervalued currency. mineral fuels and oil.394. The Chinese authorities have fixed the value of the RMB to the US dollar and kept it undervalued to maintain the price competitiveness of exports in major world markets. apparel. China is a major importer of raw materials.6 1.10. motor vehicles. China’s imports and exports are both dominated by manufactured goods. footwear and toys. copper and zinc.1b.0 31. including information and communications technology (ICT) equipment. Since 1994.201. optics and medical equipment. along with resource exporters such as Australia. with intermediate manufactured goods. energy and capital goods. Malaysia and Thailand are major sources of imports. South Korea.uschina.2 25.5 -16. power generation equipment. Manufactured goods accounted for 93% of China’s merchandise exports in 2011. and 20% of the world demand for aluminium. comprising a higher share of imports than exports.9 1.11 for exports and imports in 2010.7 183. medical equipment.394b in 2010.org China’s top exports in 2010 were electrical machinery and equipment. The USA and Germany are also major sources of imported capital goods.005. plastics. Hong Kong.9 28.0 791. power generation equipment.9 1. China’s World Trade Statistics.577.10: China’s Exports and Imports 2005 to 2010 Exports (US$b) Annual % change Imports (US$b) Annual % change Trade balance (US$b) 2005 2006 2007 2008 2009 2010 762. China accounts for around 10% of the world’s consumption of resources. China’s major trading partners are listed in Table 3.8 18. Asian countries such as Japan.8 298.3 660. 65% of the China’s export growth has come from Western companies that have directly invested in China.6 19.4 27. The expansion in China’s exports and imports between 2005 and 2010 is shown in Table 3. Its major imports in 2010 were electrical machinery and equipment. with multinational corporations (MNCs) accounting for around 54% of China’s total exports. plastics. www.2 38. South Korea. In 2005 China accounted for 25% of the world demand for steel. iron and steel.5 -11.8 17.4 261. outstripping the growth in imports. ships and boats.1 Source: The US-China Business Council (2011). This reflects the role that China plays in the processing of high value added goods. optics. the Netherlands.9% of global GDP and 10% of world exports of goods and services. the UK. chemicals. with other major export markets in North America and Europe.430. Japan.6 1. exports and imports.7 102. 35% of the world demand for iron ore and coal.0 968.0 1. but these recovered in 2010 as global economic conditions improved including international trade.8 1.5 956.217. About half of China’s exports are sold in the Asian region.577b and imports at US$1. Table 3. steel. chemicals. China’s exports grew by an average of 20% annually between 2005 and 2010. iron.0 177. China became the second largest goods trading nation in the world after the USA in 2010.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development China’s International Trade In 2012 China accounted for 14. India.132. with exports valued at US$1. including machinery and transport equipment. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 89 . resulting in a trade surplus of US$183. Singapore and Italy. furniture.7 17. Germany. The GFC in 2008-09 reduced China’s rate of economic growth. metal ores.7 1. Major export markets include the USA. However under pressure from the USA in 2005 (because of its large trade deficit with China). Taiwan. Brazil and Saudi Arabia.9 20.

2b 10. and assists the People’s Bank of China in controlling China’s domestic monetary conditions and inflation in goods and asset markets.7b 2. Korean won. Malaysian ringgit. euro.org China’ Membership of the WTO China was admitted as a member of the WTO at the Doha Conference in 2001 and became the 143rd member of the 146 nation WTO. Singapore US$32. banking. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . licence fees and royalties). Encouraging more innovation and the use of ICT in the Chinese domestic economy. Thai baht and the Canadian dollar. telecommunications and motor vehicles. Yen. However with its large trade surplus China is under growing pressure from the USA and EU to float the RMB. Australian dollar. Japan US$121.1 RMB to the US dollar. Germany US$68.1b 10.8b 4. because the RMB was undervalued. Greater access to world export markets through WTO membership will help China’s future growth and development by achieving three goals: 1. with its US dollar exchange rate moving from 8. Diversification of its export base to include more value added ETM and service exports. Daily fluctuations in the RMB are contained to a narrow band of around plus or minus 0. The gains to China of WTO membership (through higher trade volumes) must be balanced against the costs of higher unemployment and structural change in domestic industries. USA 5. The new exchange rate arrangements provide China with more flexibility in setting its exchange rate. Malaysia US$50. Attracting more foreign investment into the service sector of the Chinese domestic economy. South Korea US$138.uschina. Taiwan US$115. including adherence to agreements on intellectual property rights (such as copyright. China must also abide by the rules for free and fair trade set down by the WTO. Saudi Arabia US$32.3% against the US dollar. www.1b 3. Hong Kong US$218. USA US$283. Singapore dollar. Australia US$60.3b 1.3 RMB to 8. South Korea US$68.1b 9. Japan US$176.9b 7. as well as increasing China’s access to other countries’ markets. Zhou Xiaochuan. Russian rouble.8b Source: The US-China Business Council (2011).7b 6. United Kingdom US$38. China’s World Trade Statistics.3b 9. indicated that currencies of China’s major trading partners would be used in the basket to determine the value of the RMB: the US dollar.3b 6. British pound sterling. head of the People’s Bank of China.90 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Table 3. finance. which are facing more import competition such as retailing.8b 8. The revaluation of the RMB was small. This was a response to criticisms that China had given its export and import competing firms an unfair advantage in world trade.9b 7. Revaluation of the Renminbi and Adoption of a Managed Exchange Rate On July 21st 2005 China abandoned its peg or fixed exchange rate against the US dollar and moved to a managed peg against a basket of selected currencies of China’s major trading partners.3b 2. Netherlands US$49. Germany US$74.7b US$102. 2. patents. amounting to a 2% revaluation. Brazil US$38.4b 8.3b people to global exporters. Italy US$31.11: China’s Major Export Markets and Sources of Imports in 2010 Country Exports Country Imports 1. India US$40.4b 3. 3. China’s admission to the WTO reflected its status as an economic superpower and opened its huge domestic market of 1. making Chinese exports and import substitutes more internationally competitive.0b 4. Thailand US$33.0b 5.

Importantly annual investment growth averaged 19% over this period and investment is estimated to now account for 40% of China’s nominal GDP. The RMB 4 trillion fiscal stimulus package announced by the Chinese government in the second half of 2008 to counter the GFC was aimed at boosting public infrastructure investment to support economic growth. Recent surveys of urban fixed asset investment suggest the following trends: • • 25% of urban investment was in infrastructure.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development Trade and Investment The value of China’s exports grew by 31% in 2010 and exports accounted for 31% of GDP in 2011. through increased infrastructure. industrial complexes and technology parks. Much of the growth in exports reflected the expansion in the processing of goods that have been imported from other countries. Whilst investment in manufacturing was 12% of GDP in 2006. Bulletin.Utilities 3% 4% . much of this was development related. including apartments and houses.Water and environment 3% 3% . • Retail shopping malls and centres.Other 2% 2% 22% 24% Tertiary Industry .Infrastructure 4% 5% .12: Investment Expenditure in China 2004-06 (% of GDP) 2004 2006 Total Investment 37% 43% Primary Industry 1% 1% 14% 18% Secondary industry . water and environmental management systems. which finances the growth in China’s productive capacity through the following: • New factories. buildings. secondary and tertiary sectors (see Table 3. Data on the components of GDP show that Chinese domestic demand grew at an annual rate of 14% between 2003 and 2008.Other 6% 6% Source: Reserve Bank of Australia (2007). This reflects the growing importance of domestic demand as a future source of Chinese growth. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 91 . utilities. and inter-provincial highways to facilitate the movement of goods and people. November. the rest of China’s imported goods have been for domestic use. A large share of infrastructure investment was for the construction of extensive subway systems in China’s growing cities.Real estate 9% 10% . compared with growth of 15% in nominal GDP in the same period. Imports accounted for 27% of GDP in 2011 and whilst some of the imports have been subject to value adding and re-export. including housing construction and land purchase. and • Commercial office complexes and residential development. Table 3. water and environmental management. especially after the impact of the Global Financial Crisis in 2008-09 and the European Sovereign Debt Crisis in 2011-12 in reducing export growth. Investment in urban areas has been a result of the rapid increase in urbanisation in China.Manufacturing 9% 12% . 25% of urban investment was in the real estate sector. Domestic demand includes household consumption and business investment. The growth in investment in China appears to be broadly based across primary.12).

although capital flows fell during the GFC in 2008-09. Macao and Canada. with the majority in wholly foreign owned enterprises (US$91. Singapore. Guangzhou and Shanghai. China attracts record levels of foreign direct investment. Foreign Investment in China.0b Source: The US-China Business Council (2011). as companies continue to shift production to major Chinese cities (such as Beijing.6b 27. Multinational corporations (MNCs) locate in China to manufacture goods for export markets and for sale to China’s growing and increasingly affluent middle class in cities such as Beijing. Shanghai.13). This rapid rate of economic growth has led to a high level of resource use and environmental degradation. by 2020 it will cause 600. Total foreign direct investment was valued at US$116b in 2011 (refer to Table 3. and this could rise to 13% of GDP if stronger environmental laws are not implemented and enforced. The report found that unless pollution is controlled.92 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd Foreign Direct Investment and Multinational Corporations in China Foreign direct investment (FDI) in China remains a key driver of Chinese economic growth. Hong Kong SAR. Figure 3.000 premature deaths in urban areas and 20m cases of respiratory illness per year. Environmental Sustainability China has sustained average rates of economic growth of between 6% and 8% for the past two decades.005 US$21. The report also found that up to 7% of China’s annual GDP is lost because of pollution. China is therefore experiencing severe environmental problems associated with resource depletion and environmental degradation. The main sources of direct foreign investment in China are from Hong Kong. The Chinese government has extensive capital controls in place to encourage foreign direct investment rather than portfolio investment. mainly sourced from electricity and cement production. Japan.4b 284 US$ 1.388 US$91. Table 3.8b 22. China surpassed the USA to become the top recipient of foreign direct investment in 2002. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . China’s carbon dioxide emissions were 7. Taiwan.13: Foreign Direct Investment in China in 2011 Type of Project Equity joint ventures Co-operative joint ventures Wholly foreign owned enterprises Foreign venture capital Total Foreign Direct Investment Number of Projects Utilised FDI Value 5. Foreign direct investment flowed into China as it implemented the majority of its World Trade Organisation (WTO) commitments to open up its domestic market to free trade in 2007.2b) and equity joint ventures. The opening of the domestic market to foreign competition in 2007 and the surge in foreign investment associated with the Beijing Olympics in 2008 helped to support high growth in domestic consumption and investment in the Chinese economy. The Chinese government commissioned the OECD to conduct a study of the environment in 2007. 45% higher than the USA.687 million metric tonnes in 2009.14 shows China’s contribution of 20% to total global carbon dioxide emissions in 2006. South Korea. developing countries such as China and India are responsible for an increasing share of the world total.8% from the US$90b recorded in 2009. the USA. as factory wages average less than 5% of those in the USA.712 US$116.13). Germany.2b 35 US$ 1. the UK. Although the high income OECD countries accounted for 40% of global carbon dioxide emissions in 2006. Shenzen. In 2011 foreign direct investment in China totalled US$116b (refer to Table 3. Guangzhou and Shenzen) to take advantage of the cheap labour market. a large rise of 28. In China’s case it is due to over 70% of its electricity being sourced from coal fired power stations which pollute its environment.

As many as 300m people are estimated by the OECD to be drinking contaminated water every day in China. • Loss of topsoil and subsequent desertification due to the removal of vegetation. • Loss of lakes and wetlands has resulted in China’s total area of lakes shrinking by 15% since the 1950s. as estimates suggest that only 20% of solid waste per year is properly disposed of in China.15: Per Capita Carbon Dioxide Emissions of the Five Largest Producers 1990-2003 Source: World Bank (2007). and only 10% of sewage is treated.2 metric tonnes in India. giving firms an incentive to reduce their pollution levels by trading excess rights in a market. The outbreaks of SARS and bird flu occurred in 2003 and 2005 in China due to pollution and a lack of health and hygiene standards in both rural and urban areas. • A high incidence of respiratory diseases. A market has also been established for tradable emission permits. • Severe levels of air pollution. with China having the world’s highest emissions of sulphur dioxide. Word Development Indicators 2010.3 metric tonnes in the Russian Federation and 1. The Chinese government has begun to recognise and address the environmental problems that have emerged because of its rapid economic growth and industrialisation. World Bank. Other environmental problems in China include the following: • Loss of natural grasslands and forests because of the expansion of agriculture and industry. Washington DC. World Bank. while its wetlands have shrunk by 26%. The Chinese authorities have completed dam building projects such as the Three Gorges Project to overcome water shortages and to generate additional hydro electric power. • Inadequate disposal of household and industrial wastes. • Shortages of water due to drought and the loss of water due to inefficient irrigation systems.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development This is also reflected in China’s rising per capita carbon dioxide emissions (see Figure 3. with China having the world’s highest rate of chronic respiratory disease. China’s carbon dioxide emission levels are also amongst the highest in the world with 70% of China’s energy needs supplied by coal fired power stations and coal based home heating. World Development Indicators 2007. with the rest dumped straight into lakes and rivers causing water pollution. © Tim Riley Publications Pty Ltd Figure 3. Figure 3.15). Washington DC.14: Shares of Global Carbon Dioxide Emissions in 2006 Source: World Bank (2010).9 metric tonnes in the United States. compared to 19. China’s major cities also face water shortages due to excess demand and the lack of available water supplies. emitting 17 million metric tonnes per year. Year 12 Economics 2014 93 .2 metric tonnes in 2003. 10. This has caused severe levels of erosion and the loss of topsoil in farming regions during sandstorms. Targets have been set for pollution levels and there is a policy to move away from a reliance on coal fired power generators to using more hydroelectric and nuclear sources of power. which were 3.

• Encouraging private investment in services such as finance. and the implicit costs of the depletion of natural resources. Dualistic economy: China’s growth and development are very dependent on the Special Economic Zones in the southern and eastern provinces which are dominated by MNCs through foreign direct investment and technology. The new leadership released broad proposals for reform in May 2013: • Introducing gradual steps to allow market forces to determine bank interest rates. In May 2013 he popularised the concept of the ‘Chinese Dream’ by urging young Chinese to ‘dare to dream. Yunnan. Beijing. medical costs and lost output from respiratory illnesses. 2. He assumed office on March 14th 2013.3% of GDP. some of which are a direct result of the impact of globalisation: 1. money spent on disaster relief following typhoons and floods. China attended the UNFCCC in 2009 in Copenhagen but failed to agree with other advanced and developing countries on the size and timing of global pollution reduction targets as part of a framework for the implementation of a new Kyoto Protocol in 2012. the northern and western provinces remain far less developed and more reliant on agricultural production for the generation of income and employment opportunities. Qinghai and Hunan. and the rich southern provinces and their poorer northern and western counterparts. China increased its spending on environmental protection from 0. many problems and inefficiencies are evident in its domestic economy. China like other developing and emerging countries has a dualistic economy which creates inequality in the distribution of income and employment opportunities.8% of GDP to 1. before being promoted to the central leadership of the Communist Party of China in 2007 and groomed to become Hu Jintao’s successor. In contrast. which now applies to all new development projects. Tianjin and Guangdong where living standards are the highest in China. compared to inland western provinces such as Guizhou. Evaluation of Chinese Government Economic Policy Xi Jinping was appointed President of the People’s Republic of China at the Chinese Communist Party’s 18th Congress in 2012. per capita incomes were 100% to over 250% higher in eastern provinces such as Shanghai. The Chinese government is planning for private businesses and market forces to play a larger role in the economy. replacing former President Hu Jintao. Tianjin and Guangdong. since the World Bank estimates that pollution alone costs China between 8% and 12% of its GDP annually. The Chinese government’s priorities are to promote sustainable economic development and maintain social cohesion and stability. in direct damage to the environment from acid rain on crops. under the country’s tenth Five Year Plan which ran from 2001 to 2005. work assiduously to fulfil the dreams and contribute to the revitalisation of the nation’. • Allowing more foreign investment in finance. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . health care and other service sectors. The components of the Human Development Index show that inland western provinces have much lower HDI values than Shanghai. Tibet. Xi Jinping served as governor of the coastal provinces of Fujian and Zhejiang between 1999 and 2007. Income and social inequality: Inequality in China has grown between rural and urban populations. Beijing. and • Easing foreign exchange controls to allow the RMB’s value to be determined by market forces. Despite China’s modernisation and improved economic performance. energy. transport. The Chinese government is committed to introducing further long term structural reforms in the Chinese economy as growth slows and the limitations of a state led and investment driven economy reliant on manufacturing and exports become evident. As a career politician. Sichuan. Xi Jinping adopted the slogan of the ‘Chinese Dream’ to encapsulate his vision for environmentally sustainable development in China. This was a positive development in Chinese environmental policy.94 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd The Chinese government has also banned the logging of domestic timber since 1999 and tightened its environmental legislation by passing a law on Environmental Impact Assessment in 2003. railways and telecommunications. This policy shift is intended to improve living conditions for the growing middle class and China’s competitiveness in global markets. For example in 2008.

Over half of China’s SOEs record losses. Political and social instability: High urban incomes and the growth of employment opportunities in the Special Economic Zones have been paralleled by low rural incomes and increasing unemployment in less developed provinces. There is widespread construction of new roads. 5. electronic funds transfer system and wider ATM access for consumers and businesses. 7. There are widespread peasant revolts in China over a lack of health and education services. schools and hospitals are also poorly developed in some regions of China. and allowing freer migration of rural workers from country regions to cities for work. 4. China also needs a more efficient payments system including foreign exchange. Social security reform: To reform SOEs and deal with an ageing population. providing greater access to funds for farmers. bridges. This includes the ending of government subsidies to inefficient SOEs in electricity. Peasants also resent the one child policy imposed by the government as this limits personal freedom and impinges on Chinese tradition and culture. gas. 10. low incomes and a lack of freedom to migrate to cities where the opportunities for employment and higher living standards exist. This has led to political instability and social divisiveness. Reform of SOEs: China’s state owned enterprises (SOEs) are inefficient and only remain in operation through direct government subsidies and loans from the central bank (the People’s Bank of China). a policy priority for the Chinese government. leading to bottlenecks in the movement of goods and basic resources. Tax reforms and more efficient spending programmes are needed to achieve better fiscal outcomes. which increase budgetary pressures and inflation. railways. offsetting the profits made by the remaining SOEs. The Chinese financial system is also burdened by the large number of non performing loans to SOEs. steel and transport.© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development 3. with demands for democratic as well as economic reforms to be implemented by the Chinese government to reduce this inequality. investors and creditors. Laws are also needed to protect the environment and to eliminate corruption in government and the bureaucracy. Inadequate electricity production capacity and distribution also places a limit on China’s manufacturing capacity. 8. China’s budget deficit is around -2% of GDP. The lack of a social security system in China is one reason for the high savings rate and relatively low consumption. Social and economic infrastructure like transport. airports and ports to meet the demand from the private sector. Reform of fiscal policy: This is necessary as there is widespread tax avoidance and an ongoing problem with budget deficits. This occurred in 2007 and 2010-11 with tighter monetary policy used to raise interest rates and tighten controls on lending to reduce demand pressures and speculative activity in China’s stock market and the real estate market. Bureaucratic corruption is also a problem with many SOE managers using their power over decision making for personal gain rather than for maximising SOE economic efficiency and assisting the process of Chinese economic development. Infrastructure development: China’s rapid economic growth has severely stretched domestic freight and logistics capabilities. 6. the Chinese government needs a large social security system with unemployment benefits and pensions. dams. Reform of the financial sector: The almost entirely state owned Chinese banking system has a large level of non performing loans to SOEs. This makes the privatisation of banks and broad reform of the wider financial sector. in part to discourage excessive precautionary saving. 11. The Chinese government announced expenditure of US$120b in 2009-10 to provide basic health care for 90% of the population by 2011. including access for foreign banks. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 95 . with investment funds not earning market rates of return. The Chinese government has invested in the Three Gorges Dam Project and new nuclear reactors to increase new sources of power. Legal infrastructure: China must develop commercial laws and regulations that protect private property rights. electricity. iron. and in state owned enterprises subject to restructuring and technological change. 9. Agricultural reform: Improving the performance of China’s agricultural sector remains a priority in terms of establishing a system of enforceable land rights. Inflationary pressures: More effective management of macroeconomic policy is needed in China because its high rates of economic growth have led to continuing inflationary pressures.

China’s official unemployment figures are misleading as they do not include the estimated 10 million workers made redundant from some of China’s failed SOEs or unemployed and underemployed peasants in rural areas. Analyse the importance of international trade. Another problem is the exploitation of workers by employers through under payment or non payment of wages. Unemployment: China has been ‘pump priming’ its economy for the last decade to keep GDP growth running at close to 8%. Securing supplies for its rapidly growing energy needs is also a major priority for China as it is the world’s second largest producer and consumer of energy after the USA. China faces the long term challenge of re-balancing its economy away from its current pattern of investment and export led growth. 13. 4. foreign direct investment and the role of MNCs in China’s economic development. to more sustainable and non inflationary growth generated by expanding household consumption and the services sector. REVIEW QUESTIONS CASE STUDY OF THE INFLUENCE OF GLOBALISATION ON CHINA 1. This is also linked to the problem of global imbalances which emerged during the Global Financial Crisis. How have China’s economy and society been transformed by sustained high rates of economic growth in recent decades? 3. Unemployment is a major problem in China with the urban jobless rate rising from 4% in 2002 to over 5% in 2009 as the GFC reduced the rate of growth. where countries with low savings and current account deficits such as the USA suffered a severe economic downturn. China has an ageing population and is predicted to experience labour shortages by 2030. There have also been many cases of employers exploiting child labour in their quest to meet orders and generate higher profits. China also needs to pursue more environmentally sustainable development by using more renewable sources of energy. Evaluate the conduct of the Chinese government’s economic policy in promoting economic growth and development. 5. 7. Reform of the labour market: The Household Responsibility System in China restricts the freedom of movement of people from one province or city or town to another. higher incomes and living standards.96 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd 12. Discuss the problems encountered by China in achieving environmental sustainability. Australia. Discuss how China’s rapid economic development has led to an improvement in its HDI. To ensure its future energy supplies China has been actively pursuing outward investment in energy and resources projects around the world. 6. Discuss the main elements of China’s economic reform strategy. Greater use of market forces in the labour market could help to address this problem. whereas countries like China with high savings and current account surpluses continued to grow but at a slower pace. Year 12 Economics 2014 TimRiley RileyPublications PublicationsPty PtyLtd Ltd ©©Tim . These problems are well documented and have led to the death and injury of thousands of workers. the level needed to keep unemployment from rising too fast. A major problem in China is the lack of well defined occupational health and safety regulations which exposes workers in dangerous industries such as coal mining and manufacturing to industrial accidents and unnecessary health risks. This particularly affects rural peasants wanting to migrate to urban areas in search of employment. South America and Asia. 2. Discuss the reasons for inequality in the distribution of income in China. including Africa.

© Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development [CHAPTER FOCUS ON THE IMPACT OF GLOBALISATION “Continuing strong growth in China is arguably the international economic development with the most far reaching consequences for the global economy. China’s economy is large enough that its share of global demand for a range of commodities including energy. and especially oil. China is already the world’s second largest economy and it is possible that the size of China’s economy could surpass that of the United States within fifteen years. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 97 . may account for an increasing percentage of the world’s resources. emerging and developing countries that make up the global economy. Discuss the strategies used by the Chinese government to promote economic growth and development and the integration of China into the global economy.” China’s Share of Global Resources in 2005 Source: Commonwealth of Australia (2006). [CHAPTER 3: EXTENDED RESPONSE QUESTION Discuss the reasons for variations in the standard of living between advanced. Budget Strategy and Outlook 2006-07.

Economic development on the other hand refers to the structural changes that must occur in an economy (such as the development of social and economic infrastructure) before economic growth can take place and be sustained over time. Global environmental problems include climate change. China is a major world economic power and its development is linked to the policies of encouraging foreign trade and investment. and levels of per capita income. environmental degradation and income inequality are evident in China’s economy. The process of economic growth is where countries experience an increase in real GDP leading to rising incomes and living standards over time. Governments attempt to co-ordinate their macroeconomic policies to encourage sustainable economic growth and increased trade flows. cultural and government factors. Higher levels of economic growth and development have resulted in an improvement in China’s human development and a reduction in income poverty. pollution and over exploitation of some renewable and non renewable resources. including low levels of savings. social. The United Nations Development Programme (UNDP) calculates a Human Development Index (HDI) based on three indicators: life expectancy at birth. Large variations in the standard of living between countries occur on a global basis due to differing factor endowments and a range of other economic. 10. 2. South Asia and Latin America. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . 7. with significant levels of poverty in Africa. Differences in living standards between countries can be measured by using a variety of material and non material indicators of development. The vicious cycle of poverty model helps to explain why many emerging and developing countries experience low levels of per capita income and living standards compared to advanced countries. in order to derive the expected gains from global trade and investment. 11. Countries are ranked in terms of their HDI value each year. The global distribution of income and wealth has become more uneven with the process of globalisation. Multinational corporations (MNCs) play a major role in global production. The types of economies in the world include advanced. 6. In 2012 there were 187 countries ranked according to their HDI values. Changes in the international business cycle can impact on all economies as occurred with the Global Financial Crisis in 2008-09 and European Sovereign Debt Crisis in 2010-11. mean years of schooling. 9. threats to biodiversity. trade and investment. They account for as much as 40% of world trade through their global production webs. capital accumulation and productivity in many emerging and developing economies compared to the advanced economies of the world. However problems such as persistent inflation. A number of reasons can be advanced for the development gap or income gap between nations. investment. emerging and developing. There is a general relationship between improvements in economic growth and development in countries that ‘globalise’ (through increased levels of international trade and investment) compared to countries that are ‘non globalisers’ and do not integrate with the global economy. 3. 8.98 Chapter 3: Globalisation and Economic Development © Tim Riley Publications Pty Ltd CHAPTER SUMMARY Globalisation AND ECONOMIC DEVELOPMENT 1. 12. 4. 5. and the reform of its agricultural and manufacturing sectors.