| Shifting Patterns of Global Growth? |
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| *David Floyd **Sandhla Summan ***John McManus and ****Marcus Ling, University of Lincoln, Lincoln, LN 67 TS, England *E-mail: dfloyd@lincoln.ac.uk |
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| The current slowdown in the USA Economy has led many to question whether this will have a knock on effect in destroying global growth. This paper looks at the channels of global growth in 2008 to see whether the above view may be justified. In addition the paper draws on theories of globalisation and growth to explain recent trade patterns and makes suggestions on where growth is heading in the future. Data is used from world Economic Indicators to support the main arguments. Comparative profiles are then made of the important country players in global business. The evidence would suggest that countries both East and West are being to converge in their policy making though in the short term the current favourable growth of Eastern countries such as India and China will play a large part in maintaining positive global growth. On the negative side in January 2008 there was stock market turbulence in all world markets indicating the high degree of interconnectivity existing around the world in todays business environment. Furthermore much of the slowdown in the USA has been attributed to defaults on loans financed from the global capital markets. This financial crisis has a knock on effect in world markets and was caused by the banking system rather originating from problems in emerging markets as had often occurred in the past. In some ways even if the USA reduces interest rates rapidly to stimulate growth as has been done in January 2008 it does not mean that credit will automatically become easier. The LIBOR Rate will remain high as long as global banks fear lending to those with high risk of default. House prices in the USA and shares in banks have fallen almost 20% over the last year according to Bloomburg March 2008. Other negative aspects that have exacerbated the fear of poor global growth is the run on the Northern Rock Bank in the UK and more recently Bear Stearns in the USA. Like the fall in share prices in January 2008 of around 5% warning signals came too late. Indeed Gordon Brown in the recent Economic Forum talks of the necessity to set up additional global institutions as the world becomes increasingly globalised. Gordon Brown further suggests the establishing of an early warning system to indicate possible global market turbulence by the IMF. For countries experiencing war civil unrest peacekeeping forces should enter post conflict as well as defense lawyers in order to win the hearts and minds of people and achieve lasting progress. Furthermore many developing countries that have had some of their debts cancelled recently face higher costs and interest payments due to the increase in prices the world is now seeing partly attributed to higher energy prices. Despite these problems, governments in both Europe and USA seem to have some control over pay restraint and this could explain why growth in 2008 will still be positive according to table one. Consumption in the UK has remained resilient for the first quarter of 2008.Growth in the European Union is unlikely to manage more than 2% in 2008.In addition the EU trades more with the USA than China. Higher growth in Russia, Brazil and Eastern Europe could also help offset the global slowdown. The comparative study of growth in India, US, and China its mentioned in Table 1. Table 1 India
United States
China
Source:The World in 2008, Economist Publications Extremely positive growth has occurred in both India and China. According to the South China Morning Post March 2008 , house prices are expected to rise this year unlike in Western markets. Korukonda 2007 suggests that India is benefiting from an entrepreneurial culture in some sectors such as computing and also benefits from the languages skills achieved from the commonwealth period. China also benefits from its size and high working hours and low labour costs though suffers from poor productivity in some centrally planned investments according to Huang 2006.China is also starting to consumer more and increasing incomes should lead to further increases in consumption, trade surpluses also will have a positive influence on future growth. According to the Wall street Journal January 2008 it was the accumulation of capital in Asia that led to cheaper credit and this may well have a part to play in restoring global balance in the money markets. According to UNCTAD 2006 FDI in developing economies now accounts for 14% of the world total. Furthermore Tata of India for example has made a substantial bid for Jaguar according to the Economist 12 January 2008. Global M and A activity has increased from 5% in 1990 to 14% of the world total in 2006 for emerging market countries. Mittal owned by an Indian has recently taken over the French steelmaker Arcelor which indicates Indian firms are now starting to go all over Europe despite the language barriers that may exist. TCL of China has now taken over Thomson electricals in France. Infosys of India is now taking over part of IBM. Floyd and Mcmanus 2006 show the importance of India on the global stage in computer software developments .It is in other markets also where emerging market players are gaining dominance. For example BYD of China is now the largest global battery producer. Johnson of Hong Kong is the largest producer of small motors. It is not only China and India that are becoming dominant, the BRIC Counties also include Brazil that is now taking on Boeing and Airbus in jet engine manufacture. Cemex of Mexico now dominates the cement market. Emerging market economies often have the support of the state in certain activities, furthermore, there are many family firms which makes the decision making process more easier. It can also be suggested that as these economies grow more people who are trained abroad from emerging market origin will want to return to theses countries as opportunities improve in these expanding economies where huge potential may lie in the longer term. The theoretical framework of Dunning 1993 helps explain the change in patterns of global growth China and India for example now have improved demand in local markets. They have also been able to gain a comparative advantage in manufacturing low cost manufactured goods in China as well as focus on services and call centres in India. Both countries now have global brands as illustrated earlier and it is the support of government and family networks that has helped attribute to this success in both what Dunning refers to as location and ownership advantages. Further more Porters Diamond 1990 also shows the necessity of having good supporting industries in order to achieve national advantage which is now being developed. Addressing the Dunnings OLI factors also helps to point out a number of weaknesses, firstly China has limited experience of internationalisation partly due to the fact that the economy has not been fully open due to government restrictions. There has also been a lack of skill particularly in research based activities. Innovation has been lacking and this could partly be due to the lack of incentives particularly in government controled industries. In the case of India there are a number of concerns, firstly according to the Economist February 2008 India is experiencing several economic difficulties. Firstly the government is experiencing a deficit unlike China where savings have been higher. Furthermore, India is experiencing higher rates of inflation that are proving a drag on the economy. There are also higher levels of strikes in India and the government is also less autocratic than in China. These political and economic factors are influences in Dunnings location advantages as well as the demand conditions of Porters Diamond model 1990.These conditions need to improve to ensure lasting success. Also with regards to India and the Cast system, this may prove to be a drag on innovation and skill in some cases. Indian firms may have greater internationalisation skills compared with Chinese firms due to history, tradition and language though India needs to improve on these other factors to ensure greater success in the future. Like other emerging markets Eastern countries need to further improve infrastructure and levels of corruption in order to maintain the increases in FDI activity we are now seeing both in terms of inflows and outflows.Lasserre2006 states that most Asian countries figure high on the a International corruption perceptions index . There are also limitations to the benefits of Globalisation according to Stiglitz 2001. He states that the IMF and World Bank have imposed harsh conditions for poorer countries wishing to borrow more money. The money becomes even more difficult to borrow during the credit crunch of 2007 so some of the potential in India must now be further questioned. Table one also shows GDP per capita income to be much lower in China and India compared with USA, this illustrates the limitations of relying on emerging markets to ease the pain of slowing global growth . In addition the UK for example trades more with USA and Germany compared with China and Japan which shows how many countries cannot be isolated from the slowdown in the USA. Conclusion It has been shown that the world has become more reliant on Asia particularly during the time of a credit crunch and slowdown now affecting USA and is also set to influence Europe during 2008. Slower global growth is predicted for the next couple of years according to the World in 2008.This will be apparent in both Western and emerging markets.The Bank of England also predicts greater inflationary pressure in the world economy over the next year partly due to the rising cist of oil and food. Lower interest rates in the USA also pose a further risk to inflation. Continued growth in Asia is likely soften the slowdown in the West, however application of internationalisation theory and data has shown that this may only have limited success. There are still weaknesses in the economies of Asia that need to be addressed. Infrastructure, lack of internationalisation and skill will take time to establish though Asian economies will be playing a greater part than ever before in helping to maintain positive global growth. References Dunning, J. (1993), The Globalisation of Business, Routledge, London. Floyd, D. and Mcmanus, J. (2006), “The role and influence of foreign direct investment on the development process: the case of the software industry in Romania, China, India and the Philippines,” Global Business and Economics Review Vol. 8 (1/2), pp. 119-132 Huang, Y. (2006), “China could learn from Indias slow and quiet rise,” The Financial Times January 2006. Korukonda, A. (2007), “Commonwealthv free market capitalism,the case of India and China,” International Journal of Social Economics Vol. 34 (10), pp. 772-780. Lassserre, P. and Schutte, H. (2006), Strategies for Asia Pacific 3rd edition, Palgrave Macmillon. Porter, M. (1998). Competitive Advantage of Nations, Free Press South China Morning Post, March 2008 Stiglitz, J. (2001). Globalisation and its discontents, Palgrave Macmillan The Wall Street Journal , January 2008 World Investment Report 2008, United Nations Publications |