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Chapter 3

THE DIFFERENCES BETWEEN ECONOMIC GROWTH ANDECONOMIC DEVELOPMENT

In comparing the standards of living between countries in the world it is important to distinguishbetween the concepts of economic growth and economic development. All countries are trying to sustaineconomic growth in terms of increasing their real GDP and living standards. However governments arealso 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 sinceit involves increasing the productive capacity of an economy. Tis can lead to rising national output,incomes, employment and living standards. Economic growth can come about from two main sources:

1. Te increased use of resourcessuch as land, labour, capital and entrepreneurship due to improvedtechnology or management techniques; and/or

2. Te increased productivity of existing resource usethrough rising labour and capital productivity.Capital wideningoccurs when the capital stock keeps pace with growth in the labour force. Capitaldeepeningoccurs when the capital stock outstrips the growth in the labour force.

Economic growth leads to an outward shift of an economys production possibility curve or frontier,enabling it to achieve rising national output, material welfare and living standards over time. Economicgrowth is represented by an outward shift of an economys production possibility curve as illustrated inFigure 3.1. Any point on the production possibility curves PP and P

1P

1represents 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 thecurve PP. Economic growth can only occur if more resources are used, or existing resources are usedmore productively, allowing the production possibility frontier to shift outwards from PP to P

1P

1. For

example, economic growth is represented by a movement from point X on curve PP to point Y on curveP

1P

1. At point Y, OC

1consumer goods and OK

1capital goods can be produced or any combination

of consumer and capital goods as long as they fall along the curve P1P

1. Te 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 OK1capital goods.

Tim Riley Publications Pty Ltd Chapter 3: Globalisation and Economic Development 67

Tim Riley Publications Pty Ltd Year 12 Economics 2014

Globalisation and Economic Development

Consumer Goods

Capital Goods

economic growth

0

X

Y

C

C1

K K1

P

P P1

P1

Figure 3.1: The Process of Economic Growth

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Chapter 3: Globalisation and Economic Development Tim Riley Publications Pty Ltd68

Year 12 Economics 2014 Tim Riley Publications Pty Ltd

In contrast to economic growth, economic development refers to the process of structural changeneeded in an economy for economic growth to occur. Economic development is a qualitative process,involving the development of an economys economic and social infrastructure. A major structuralchange with economic development is the transformation of an economy from a rural based agriculturalsociety, to an industrial and service based urban society. Te composition of the workforce also changes,

due to increasing specialisation of production, such as higher agricultural output due to improvedmechanisation, technology and farming methods. Tis allows resources, including labour, to be releasedfrom agriculture into manufacturing and service industries, causing changes in employment patterns.

Te construction of roads, railways, schools, hospitals, universities, dams, bridges, factories, powerplants, ports and airport facilities are examples of economic development. In Figure 3.2the process ofeconomic development is shown by the linkages between saving, investment and resource use, leadingto economic growth. Te development process involves the use of more resources and/or the useof better quality resources (through higher productivity) to improve the distribution of income anddeliver real increases in living standardsthrough a trickle down effect, where the benefits of economicgrowth are spread throughout the whole population. Economic development involves improvements

in infrastructure, and the human, physical and institutional capital necessary to sustain economicgrowth and improve the quality of life. Effective domestic and overseas demand are also importantin developing markets for exports, and in encouraging domestic saving and investment. Also greaterparticipation by a country in the process of globalisation can lead to increased foreign investment andtransfers of technology and management skills, which can assist the process of economic development.

Higher Standard of Living and Incomes

Figure 3.2: The Process of Economic Development

Income Distribution

Economic Growth

Efficiency

Resources

Investment

Saving

Exports

quantity of resources

quality/productivityof resources

institutions population growth

supply of saving demand for exports

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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. Te 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. Te number of peopleliving in extreme poverty in the world fell from 1.9b (43.1%) in 1990 to 1.7b (34.1%) in 1999, andto about 1.2b (20.6%) in 2010 as shown in Table 3.1. However the substantial reduction in extremepoverty in this 20 year period disguises large regional differences in the levels of poverty.

Table 3.1shows that the greatest reduction in poverty occurred in East Asia and the Pacific, where thepoverty rate declined from 56.2% in 1990 to 12.5% in 2010, and the number of people living on lessthan US$1.25 a day fell by more than 700m. Much of this decline was in China, where poverty fellfrom 60.2% to 11.8% in this period, leaving 400m fewer people in poverty. Between 1990 and 2010the 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 Eastand North Africa fell by more than 50% between 1990 and 2010. Te World Bank estimated that therewere 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%

Europe and Central Asia 1.9% 3.8% 0.7%

Latin America and the Caribbean 12.2% 11.9% 5.5%

Middle East and North Africa 5.8% 5.0% 2.4%

Sub Saharan Africa 56.5% 57.9% 48.5%

World 43.1% 34.1% 20.6%

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 DevelopmentGoal (MDG) target of reducing 1990 poverty rates by half by 2015 will be met if there are sustainedrates 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 halfof the worlds 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 WorldBank forecasts the proportion of people living in extreme poverty will fall to 16% by 2015.

Te Sub Saharan African region remains the poorest in the world and is most targeted by the WorldBanks development aid. Te median poverty line for developing countries was less than 2005 PPPUS$2 per day in 2008, with 2.4b people in the world estimated to live on less than US$2 per day. Tis

was approximately 43% of the worlds population estimated to suffer from extreme income povertywith 1,125m in South Asia, 659m in East Asia and the Pacific, and 562m in Sub Saharan Africa.

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Figure3.3:TheDistributionofW

orldIncomein2011.

T

ismaprepresentseconomiesclassifiedaccordingtoWorldBankes

timatesof2010GrossNational

In

come(GNI)percapita.

Figuresare

incurrent(2011)USdollars.

So

urce:WorldBank(2013),WorldDevelopmentIndicators2013,WorldBank,WashingtonDC.

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Figure 3.3 shows the uneven distribution of world income from World Bank data on Gross NationalIncome (GNI) per capita (i.e. income per head of population) in 2011. Te World Bank classifiescountries into four categories in terms of GNI per capita:

1. Te low income countries (less than US$1,025) are predominantly found in Central and Southern

Africa (such as Chad and Niger) and West and South Asia (such as Afghanistan and Cambodia).2. Lower middle income countries (US$1,026 to US$4,035) are located in Eastern Europe (such as

the Ukraine), the Middle East (such as Iraq), Northern and Southern Africa (such as Morocco andSudan), Central and South America (such as El Salvador and Bolivia) and Asia (such as India).

3. Upper middle income countries (US$4,036 to US$12,475) are located in Central and SouthAmerica (such as Mexico and Brazil), North and South Africa (such as Libya and South Africa),Eastern Europe (such as the Russian Federation) and Asia (such as China).

4. Te high income countries (US$12,476 or more) are mainly located in Western Europe (such asthe UK and France), North America (such as the USA and Canada), North East Asia (such as Japanand Korea) and Australasia (such as Australia and New Zealand).

Te global distribution of wealth refers to a comparison of the ownership of net assets between countriesand regions of the world. Te distribution of global wealth differs from the global distribution of incomesince it measures net assets rather than the current average annual income of citizens of countries.Figure 3.4shows regional shares of wealth for the global economy in 2010, with 64% of total global

wealth estimated to be held in the rich continents of North America (34%) and Europe (30%).

Figure 3.4: Regional Shares of Global Wealth in 2010

Africa 1%

India 1%

China 3%

Middle East 3%

Latin America and the Caribbean 4%

Asia Pacific 24%

Europe 30%

North America 34%

Source: World Institute for Development Economics Research (2010), United Nations University.

It is clear from Figure 3.4 that the global distribution of wealth is more uneven than the globaldistribution of income. For example, North America is estimated to have 34% of global wealth and24% of global income or GDP, yet accounts for only 5.2% of world population. Similarly Europe isestimated to account for 30% of global wealth and 23% of world GDP or income, yet has only 9.6% of

world population. Terefore North America and Europe account for 64% of global wealth.

Te richest countries in Asia (such as the NIEs and Japan) are estimated to have 24% of global wealthand 31% of global GDP or income, and Asia accounts for 52% of world population. If China (3% ofglobal wealth) and India (1% of global wealth) are included with the Asia Pacific region, it has a 28%share of the worlds total wealth. Te Middle East, with many large oil exporting nations, has around3% of the worlds wealth and accounts for 10% of world population. Te least wealthy region in the

world is Africa with just 1% of total global wealth, yet it accounts for 10% of the worlds population.

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Income and Quality of Life Indicators

Large variations in the standard of living occur between countries on a global basis. Te standard ofliving 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, nutrition, energy consumption and health services, which measure the quality of life.

Te development indicators in Table 3.2 are mainly from the United Nations Development Programmes(UNDP) Human Development Report (HDR) 2013 which compared standards of living betweencountries in 2012. Te Human Development Report separated 187 countries into three categories, basedon three human development indicators: GNI per capita, mean years of schooling and life expectancy:

1. Very high human development countries (47) and high human development countries (47)included Canada, the USA, Australia, New Zealand, Germany, France, Italy, the United Kingdom,Norway and Singapore. A total of 94 countries were listed in this category in 2012.

2. Medium human development countries(47 were listed in 2012) included Tailand, China, Egypt,the Philippines, Fiji, Vietnam, Indonesia, Iraq, India, Cambodia and Bolivia.

3. Low human development countries(46 were listed in 2012) included Nigeria, Uganda, Ethiopia,anzania, Zambia, Rwanda and Mozambique.

GNI per capitais a basic indicator of economic development of a country as it measures the standard ofliving of residents in that country. In 2012 low human development countries had per capita incomesthat averaged PPP US$1,633, whilst medium human development countries had higher average percapita incomes of PPP US$5,428. Tis was significantly lower than the high human developmentcountries with GNI per capita incomes averaging PPP US$11,501 in 2012, and the very high humandevelopment countries having per capita incomes that averaged PPP US$33,391. Te growth in GDPper capita or income is an indicator of economic growth in a country. High human developmentcountries had an average annual growth rate of 0.9% in 2011-12, whereas the medium human

development countries grew faster at 5.2%, and low human development countries grew by 3.7%.

Demographic indicators include particular population or human capital features of development.Medium and low human development nations account for approximately 70% of global populationyet only produce about 25% of the worlds GDP, whilst the very high and high human developmentcountries account for 30% of global population, but produce nearly 75% of world GDP. Low andmedium development countries tend to have high population growth rates, high birth rates, fallingdeath rates, high fertility rates and low life expectancy. In contrast, the high human developmentcountries tend to have lower birth and death rates, lower population growth and fertility rates, andlonger life expectancy. Te extent of urbanisation in high human development countries approached77.6% in 2012, whereas in medium and low human development countries it ranged from 43.7% to33.6%, reflecting higher concentrations of population in rural areas, where agriculture is carried out.

Low and medium human development countries had higher rates of infant mortality in 2011 than thehigh human development countries, lower rates of adult literacy, and higher levels of undernourishment.

Access to primary and secondary education in high and medium human development countries wasrelatively high compared to the low human development nations, where only 60.8% of the adultpopulation on average was literate in 2010 (see Table 3.2). In addition, the number of doctors per1,000 people in high income countries averaged 2.8 over 2005-10, compared to an average of 1.2 in themedium income countries, and just 0.2 in the low income countries in the same period.

Other indicators in Table 3.2 include the high dependence of low human development countries onforeign aid and their high agricultural output to GDP ratio, compared to high and medium humandevelopment countries. Tey also consume an average of 134 kilowatts (kw) of electricity per capita,

compared to the high human development nations average of 7,518 kw per capita.

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Table 3.2: 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. Countries

*GNI per capita (av. PPP) 2012 US$33,391-US$11,501 US$5,428 US$1,633

GDP pc Annual Growth 2011-12 0.9% 5.2% 3.7%

GDP 2011 US$b (av. PPP 2005) US$48,972b US$18,095.7b US$1,948.5b

Total Population 2012 2,173.5m 3,520.5m 1,280.7m

Fertility Rate (births/woman) 2012 1.8% 2.1% 4.2%

Population Growth p.a. 2000-10 0.6% 1.1% 2.2%

Urban Population 2012 (% of total pop.) 77.6% 43.7% 33.6%

Undernourishment 2011 (% of total pop.) < 5.0% 12% 29%

*Life expectancy (years) 2012 80.1 71.6 59.1

Doctors per 1,000 people (av. 2005-10) 2.8 1.2 0.2

Infant Mortality (per 1,000 births) 2011 6 46 95

Secondary Education 2010 90.0% 60.0% 32.0%

Primary Education 2010 95.0% 89.0% 80.0%

*Adult Literacy Rate 2010 99.0% 82.3% 60.8%

Foreign Aid (% of GDP) 2010 0.0% 0.2% 5.5%

Manufactures/Total Exports (%) 2010 70.1% 79.9% 19.4%Agriculture/GDP (%) 2011 1.0% 10.0% 27.0%

Energy Consumption 2005 7,518 kw pc 1,146 kw pc 134 kw pc

Domestic Investment (% of GDP) 2011 19.9% 29.0% 18.4%

Domestic Savings (% of GDP) 2011 17.6% 30.0% 26.5%

Exports (% of GDP) 2011 24.2% 27.0% 24.9%

Imports (% of GDP) 2011 23.7% 26.2% 27.9%

Debt Service Ratio (% of GDP) 2011 4.7% 8.9% 4.6%

Inflation 2011 2.3% 7.1% 10.1%

Sources: United Nations Development Programme (2013), Human Development Report 2013, Palgrave Macmillan, NYand World Bank (2013), World Development Indicators 2013, Washington DC. * The three HDI indicators

Whilst domestic saving and investment levels are between 17% and 30% of GDP in both highand medium human development countries, there is a lower level of investment in the low humandevelopment category of countries. Although all three categories of countries had high percentagesof GDP accounted for by exports and imports, the low human development countries tended to havea greater import share of GDP because of a reliance on imports of energy. Given the large range anddifferences in many of the development indicators presented inTable 3.2, the UNDP calculated aHuman Development Index(HDI) value for each of the 187 countries in the Human Development

Report 2013by measuring three variables considered to be crucial for human development or progress.

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Te following three variables are considered by the UNDP to be fundamental to human progress:

1. Life expectancy at birth (measured in years)

2. Adult literacy and educational attainment (measured in average years of schooling)

3. Real Gross National Income (GNI) per capita, measured in 2005 PPP US dollars

Once the Human Development Index is calculated, countries are ranked by the UNDP accordingto their human development achievements. Te HDI is a more comprehensive measure of humandevelopment than GDP or GNI per capita, and can be adjusted over time. Changes in HDI ranks overtime show the progress made by countries in each indicator and in overall human development.

Te 94 countries in the very high and high human development category had HDI values in 2012ranging from 0.955 to 0.712; the 47 countries in the medium human development category had HDIvalues between 0.697 and 0.536; whilst the low human development category of 46 countries had HDIvalues ranging between 0.534 and 0.304.

Te top five, a selected middle five and the bottom five countries in terms of HDI rankings for 2012

are listed in Table 3.3, according to the three indicators used to calculate the HDI. Australia rankedsecond in 2012 (up from fourth in 2006) with 82.0 years for life expectancy; an average of 12 years ofschooling per person; a GNI per capita of PPP US$34,340; and a HDI value of 0.938.

Table 3.3: The Top, Middle and Bottom Five Countries in the UNs 2012 HDI Rankings

HDI Rank Top Five Life Expectancy Mean Years of Real GNI HDICountries Schooling pc (PPP US$) Value

1 Norway 81.3 years 12.6 48,688 0.955

2 Australia 82.0 years 12.0 34,340 0.938

3 United States 78.7 years 13.3 43,480 0.9374 Netherlands 80.8 years 11.6 37,282 0.921

5 Germany 80.6 years 12.2 35,431 0.920

Selected Middle Five Countries

100 Jordan 73.5 years 8.6 5,272 0.700

101 China 73.7 years 7.5 7,945 0.699

102 Turkmenistan 65.2 years 9.9 7,782 0.698

103 Thailand 74.3 years 6.6 7,722 0.690

104 Maldives 77.1 years 5.8 7,478 0.688

Bottom Five Countries

183 Burkina Faso 55.9 years 1.3 1,202 0.343

184 Chad 49.9 years 1.5 1,258 0.340

185 Mozambique 50.7 years 1.2 906 0.327

186 Congo Dem. Rep. 48.7 years 3.5 319 0.304

186 Niger 55.1 years 1.4 701 0.304

Source: United Nations Development Programme (2013), Human Development Report 2013. www.undp.org

NB: PPP is purchasing power parity in US$ which adjusts GNIs for variations in national prices and exchange rates.

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THE DIFFERENCES BETWEEN ECONOMIC GROWTH ANDECONOMIC DEVELOPMENT

1. Explain the difference between the processes of economic growth and economic development.

2. Discuss the extent of poverty amongst regions that make up the world economy.

3. Refer to Figure 3.3 and describe the distribution of world income in 2011.

4. Refer to Figure 3.4 and describe the distribution of global wealth in 2010.

5. Refer to Table 3.2 and the text and contrast the standard of living in very high and high, mediumand low human development countries.

6. How does the UNDP calculate the Human Development Index? Refer to Table 3.3 and accountfor the differences in HDI rankings between the top five countries, a selected middle five countriesand the bottom five countries in 2012.

7. Define the following terms and add them to a glossary:

economic development GNI per capita life expectancyeconomic growth Human Development Index literacyglobal distribution of income human development indicators povertyglobal distribution of wealth infrastructure quality of life

REVIEW QUESTIONS

Figure 3.5shows a summary of how the HDI is calculated according to changes in a life expectancyindex, an education index and a GNI index. Te World Bank and UNDP believe that progress ineconomic development should lead to progress in human development within countries and regions.

Tis progress can be measured using changes in the HDI over time to ascertain if citizens in mediumand low income countries are improving their opportunities to achieve the following:

Leading a long and healthy life as measured by changes in life expectancy.

Acquiring knowledge and skills through higher rates of adult literacy and enrolment ratios inschools, colleges and universities. Tis is measured by mean years and expected years of schooling.

Enjoying a decent standard of living through earning higher per capita incomes as measured byrising levels of GNI per capita over time.

Figure 3.5: Calculation of the Human Development Index

United Nations Development Programme (2010), Human Development Report 2010, Palgrave Macmillan, NY.

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DEVELOPING, EMERGING AND ADVANCED ECONOMIES

A major change in the global economy has been the rising importance of developing and emergingeconomies (153 in total) in their contribution to world output and world trade. Within this group ofeconomies, the major emerging economies of Brazil, Russia, India and China (the BRICs) have become

very dominant by sustaining higher rates of growth than the advanced economies (35 in total) such asthe USA, countries in the Euro Area, Japan and the NIEs. Tis is why the BRICs are classified as majoremerging economies. However the success of the BRICs and other emerging economies in sustaininghigh rates of growth and development has not been matched by many other developing economies suchas Albania, urkey, Bangladesh, Cambodia, Pakistan, Egypt, Chad, Malawi and Bolivia.

1. Developing economiesare also known as low income economies since their levels of per capitaincome range from US$1,025 or less to a high of US$4,035 according to the World Bank. Mostof the poorest developing economies are located in Sub Saharan Africa with countries such asogo, Malawi, Zambia, Guinea, Liberia, Chad, Congo, Mali and Niger characterised by per capitaincomes that are less than US$1,500. Whilst there is some link between increased global economic

integration, increased trade and a reduction in poverty, this has not occurred in many developingcountries. Te reasons appear to be a lack of resources, poor levels of governance and stability, andhigh trade barriers faced in accessing export markets in emerging and advanced economies.

2. Emerging economiesor high or upper middle income economies have per capita incomes rangingfrom US$4,036 to US$12,475. Major emerging economies include Brazil, Russia, India and China(the BRICs), Mexico, Nigeria and South Africa and oil exporting countries in the Middle Eastsuch as Saudi Arabia, Kuwait and the UAE. As a group, emerging economies have increased theircontribution to world output and trade and are undergoing rapid economic development. Tishas led to a significant reduction in poverty through rising per capita incomes, increased accessto education and health care, and a general rise in living standards. In total the major emergingeconomies accounted for around 30% of world output and about 20% of world trade in 2012.

3. Advanced economieshave per capita incomes over US$12,476, but amongst the very high incomeor major advanced economies the average per capita income is US$33,391. Te major advancedeconomies include the USA, Euro Area (17 countries), Japan, the UK, Canada, the NIEs (Korea,aiwan, Hong Kong SAR and Singapore) and other advanced economies (such as Australia, NewZealand, Norway and Sweden). Te 35 advanced economies accounted for 50.1% of world outputand 61.2% of world exports in 2012, making them the dominant group in the global economy.However as developing and emerging economies have become more open to trade, their exportsas a percentage of their GDPs, rose from 18% in 1990 to 30% in 2008. Te increasing share ofexport revenues to low and middle income economies GDPs is shown in Figure 3.6.

Figure 3.6: Export Shares of GDP for Low, Middle and High Income Economies

Source: World Bank, (2010),World Development Indicators 2010, Washington DC.

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The Reasons for Differences in Economic Development between Nations

Tere is a large contrast in the levels of economic development achieved by advanced countries suchas the USA and Australia, and emerging countries such as China and India, and developing countriessuch as Pakistan, Cambodia and Ethiopia. Tis contrast in the level of economic development between

the three groups of countries is often referred to as the development gap since the distinguishingfeatures of many emerging and developing countries are low per capita incomes, low levels of saving,investment, capital formation and economic growth, whereas advanced countries are characterised byhigh real per capita incomes and high levels of saving, investment, capital formation and economicgrowth. However large emerging countries such as Brazil, Russia, India, and China are closing this gapquickly by sustaining higher rates of economic growth, rising per capita incomes and large reductionsin poverty. Tey have also increased their rates of domestic saving and investment.

Te development gap leads to significant contrasts in living standards between advanced countries andemerging and developing countries. Te majority of emerging and developing countries are located inthe southern hemisphere and are largely confined to the continents of Asia, Africa, South and Central

America. Te advanced countries are mainly located in the northern hemisphere (except for Australiaand New Zealand) in the continents of Europe, North America and parts of North East Asia (such asJapan, Hong Kong SAR, Korea and aiwan). Te income gap between the advanced and emergingand developing countries is therefore often referred to as the North-South Divide. Some of the mainreasons for the differences in the level of economic development between advanced and emerging anddeveloping countries are as follows:

Low per capita incomesin emerging and developing countries reduce standards of living relative toadvanced countries and increase the extent of income poverty. Low per capita incomes reduce theability to save and invest and the supply of capital for capital widening and deepening to promoteeconomic development. Terefore many emerging and developing countries experience difficultiesin achieving high levels of productivity and economic growth relative to advanced countries, and

may become trapped in a self perpetuatingvicious cycle of poverty as illustrated in Figure 3.7. Low levels of savingin many emerging and developing countries result from low per capita incomes

and widespread rural poverty and indebtedness. Poorly developed capital markets can discouragesaving, as does the conspicuous consumption of Western luxury consumer goods. Governmentsin emerging and developing countries can also reduce savings by running large budget deficits andfunding these deficits through external debt borrowings which can lead to high debt servicing costs.

A lack of infrastructure and capital formationcan retard economic growth and development inemerging and developing countries by preventing the formation of markets, and the efficient use oflabour and capital resources. Tis can lead to high rates of unemployment and underemployment.

Low levels of technological progress and labour productivity can lead to low rates of economic

growth being achieved in many emerging and developing countries. Tis may be sourced from theuse of labour intensive and traditional methods of agriculture and manufacturing.

Low per capita incomes

Figure 3.7: The Vicious Cycle of Poverty

Low levels of investmentand rates of capital accumulation

Low levels of savingLow levels of productivity

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High population growth ratesin many emerging and developing countries leads to high dependencyratios and increases the demand for education, health, housing, employment and transport services.If population growth outstrips economic growth in an emerging or developing country, livingstandards can fall, increasing the incidence of poverty and retarding economic development.

Demand inflationcan arise in many emerging and developing countries if the volume of domesticproduction does not satisfy the economys level of aggregate demand. Economic growth andprogress in human development will fall if inflation reduces real incomes and misallocates resources.

Lack of foreign exchange and high levels of foreign debt in many emerging and developingcountries may lead to high debt servicing costs. Persistent current account deficits are oftenrecorded by many emerging and developing countries because of their reliance on agriculture andlabour intensive manufactured exports, and a high dependence on imports of energy and capital.

Economic dualismis a common feature of many emerging and developing countries which have acolonial legacy: an urban elite in a formal commercial economy, alongside a less formal or traditionalrural economy, dominated by subsistence agriculture and the use of barter for market exchange.

Tedemonstration effectis a major problem in many emerging and developing countries caused

by rural peasants migrating to cities in search of employment. Unable to find jobs, they live inpoverty in shanty towns with inadequate water, power, education, health, sanitation, housing andemployment. Tis creates extra demands on public resources and services. Large shanty townsexist in cities such as Calcutta, Mexico City and Rio de Janeiro. Such ghettos are prone to naturaldisasters such as floods and mud slides, which can cause a major loss of life and increased poverty.

Institutional problemscan affect many emerging and developing countries, such as corrupt andinefficient governments, which can lead to political instability, civil wars and disorder. Tis canundermine flows of inbound foreign investment needed to support and finance the process ofeconomic development. raditional cultures and institutions in many emerging and developingcountries can also impede the adoption of new technologies and management techniques which areneeded to sustain higher rates of economic growth and development.

THE EFFECTS OF GLOBALISATION ON ECONOMIC DEVELOPMENT

Te globalisation of world economic activity refers to the greater levels of integration between theworlds economies. Tis has resulted from reductions in trade barriers and greater financial marketliberalisation. Tis integration led to increased growth in world GDP, trade and financial flows andflows of portfolio and direct foreign investment up until the Global Financial Crisis in 2008-09.

A study of 72 countries by the World Bank in 2001 found that the globalisers or countries whichincreased their ratio of trade to GDP grew almost four times faster than those that did not (i.e. nonglobalisers). Te globalising economies, such as China, India, Malaysia, Brazil and Mexico grew onaverage by 5% in the 1990s compared to an average of 1.4% per year for non globalising countries.

Te globalisers also grew faster than the developed or advanced countries and closed the income gapbetween them, by achieving higher rates of economic growth and development. Tese trends are shownin Figure 3.8. Globalisation has had its most profound effect on East Asian economies includingChina, the NIEs and ASEAN, where increased trade and economic development has led to a largereduction in world poverty and an improvement in the HDIs of these countries over time.

Tere have been several other effects of globalisation on world economic development:

An international convergence of economic systems as more countries adopt market capitalism anddemocracy as the preferred types of economic system and government or political system.

Te increased risk of financial contagion as financial crises can be transmitted quickly from oneeconomy or region to another as was evident by the Global Financial Crisis in 2008-09. Tisrequired global policy co-ordination by the G20 and the reform of global financial architecture.

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Despite the positive impact of globalisation on some countries, it has tended overall to reinforce theexisting income disparities between advanced and emerging and developing countries. Since 1990twenty countries have suffered a reversal in their HDIs according to the World Bank (2004). Globaldisparities in the HDI are shown in Figure 3.9. Between 1975 and 2002 improvements in HDIsoccurred mainly in the high income OECD countries and East Asia and the Pacific. Tis was dueto sustained economic growth and rising real incomes being translated into improvements in humandevelopment. Tere was also some improvement in HDIs for Latin America and the Caribbean, the

Arab States and South Asia. However setbacks in HDI progress occurred in Central and Eastern Europeand the Commonwealth of Independent States (CIS), where countries are making the transition tomarket capitalism. However the most notable reversals in HDIs occurred in Sub Saharan Africa, wheremany countries do not experience substantial economic growth or development at all.

In 2004 20 countriesexperienced reversals intheir HDIs, with 13 in SubSaharan Africa. Much ofthis reflected the impact ofthe HIV/AIDS epidemic onlife expectancy. Te otherreversals were in countries inthe CIS which experienceda fall in per capita incomesand human development in

the 1980s due to high ratesof structural change andrestructuring in industry.Te UNDP identified27 top priority countries(shown in Figure 3.9) failingto make progress in humandevelopment: 21 in SubSaharan Africa, 3 in the ArabStates, and one each in East

Asia and the Pacific, South

Asia, and Latin America andthe Caribbean.

Figure 3.8: Growth Rates of Developed Countries, Globalisers and Non Globalisers

Source: DFAT (2003),Globalisation, Keeping the Gains, Economic Analytical Unit, Canberra.

Figure 3.9: Top and High Priority Countries in Raising HDIs

Source: UNDP (2004), Human Development Report 2004, Oxford University Press.

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Global Trade, Investment and Transnational Corporations

World trade in goods and services grew by an average of 8% per anum between 2003 and 2008 asthe global resources boom led to strong demand for commodities and resources. Te exports of theadvanced economies grew by 5.6% per annum but the emerging and developing economies increased

their exports by 9.7% per annum in the same period. However in 2009 world trade contracted by 12%because of the impact of the Global Financial Crisis. World trade volumes recovered in 2010 and grewby around 12%, assisted by strong growth in China and East Asia.

Compositional shifts in world trade have occurred with more trade in EMs (high technology goods),services and intellectual property. rade in component parts is one example of this changing tradepattern, with one third of all manufactures traded in the 2000s involving trade in parts and components.Tis type of trade, along with services trade, has created a web of global production facilities whichconnect subsidiaries of transnational or multinational firms, leading to intra-industry trade. Manyof the largest multinational corporations (MNCs) have sales that exceed the value of the GDPs of anumber of emerging and developing nations. Underpinning much of the growth in world trade has

been the liberalisation of trade regimes by developing countries through bilateral and regional tradeagreements, membership of the WO, and participation in the Doha Round of multilateral trade talks.

Global foreign direct investment (FDI) flows grew strongly between 2003 and 2007 reaching a totalof US$2 trillion in 2008. However the Global Financial Crisis led to a 16% decline in FDI flows in2009 and they fell to US$1.1 trillion (refer to Figure 3.10). FDI flows were forecast to recover toUS$1.2 trillion in 2010 with the share going to developing and transition economies expected toincrease relative to the advanced economies. Tis reflects the trend towards growing MNC interest ininvesting in developing and emerging economies because of potentially higher returns on investmentfunds due to cheaper labour costs, extensive natural resources and fast growing local markets due to therising middle class. Some of the major emerging and developing host economies receiving FDI includeChina, India, Brazil, Russia, Mexico, Vietnam, Indonesia, Tailand, Malaysia, South Africa and Peru.

Te major sectors in receipt of FDI by MNCs in emerging and developing countries include the primary(e.g. agriculture, mining, petroleum and timber), manufacturing (e.g. chemicals, metals, machinery andmotor vehicles) and service (e.g. electricity, gas, water, construction, transport, communications, financeand business) sectors. Another major recent trend has been the growing amount of FDI outflowsfrom Brazil, Russia, India and China (the BRICs) by MNCs from BRIC countries seeking to secureresources and investment projects in other countries. FDI flows from BRIC countries reached a valueof US$147b in 2008 and accounted for around 9% of world outflows of FDI. Government policies ofgoing global have supported domestic BRIC enterprises investing on a global basis to sustain growth.

Figure 3.10: Foreign Direct Investment by Groups of Economies 1980-2009 (US$b)

Source: UNCTAD (2010), World Investment Report 2010.

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Global Environmental Sustainability

Climate change (caused by greenhouse warming and ozone depletion), the loss of biodiversity,deforestation, desertification, persistent organic pollutants and the environmental health of the seas andsea bed (including acidification) are some of the key issues relating to the global commons or natural

environments. Tese environmental problems have worsened as global economic activity increases, andoverpopulation puts pressure on natural resources. Tere is a growing awareness amongst advanced,emerging and developing countries that global strategies and solutions are required to address theseenvironmental concerns for the benefit of current and future generations. Te Earth Summit held in2002 in Johannesburg addressed some of these global environmental problems.

Advanced countries have created many of the global environmental problems that exist through their highlevels of carbon dioxide emissions caused by industrial pollution and high levels of energy consumption.Developing countries have pursued economic development but often at the cost of environmentalquality, by causing large scale deforestation and desertification, as they expand agricultural production.Increasing rates of industrialisation and urbanisation in the emerging and developing world have also

led to higher levels of pollution and greenhouse gases. Since the Rio Earth Summit in 1992, substantialco-operation between countries on environmental matters has occurred, with over 130 environmentaltreaties signed on issues such as climate change and biodiversity (refer to Table 3.4).

Table 3.4 : 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, ozone depletion, a rising sea level, 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, UN Convention on Biodiversity

expansion of agriculture and illegal hunting Convention on Int. Trade in Endangered Species

Over shing and exploitation of marine Economic Exclusion Zones resources through illegal shing, whaling UN Convention on the Law of the Sea and oil spills Antarctic Treaty

However major disagreements have arisen between advanced and developing countries over the signingof the Kyoto Protocoland the acceptance of emission targets for greenhouse gases. Te issue of globalclimate change is high on the agenda of global efforts to negotiate a new Kyoto Protocol after theformer agreement lapsed in 2012. Te most recent and reliable scientific evidence on climate change,undertaken by the Intergovernmental Panel on Climate Change or IPCC (2007), indicated that the rateof global warming has been nearly twice as fast in the last 50 years as in the last 100 years. Te average

global temperature is predicted to rise by 3.5 degrees Celsius between 2000 and 2100 if global measuresare not taken to reduce the level of greenhouse gas emissions.

Tese emissions are mainly carbon dioxide (77%), methane (14%), nitrous oxide (8%) and fluorinatedgases (1%) as shown in Figure 3.11. Te Stern Report in 2006 recommended the development of aglobal carbon trading scheme to reduce global emissions. Te sources of greenhouse gas emissions inFigure 3.11 underline the scope of the problem as most human activities burn fossil fuels and generategreenhouse gases. Tese include energy related processes (64.7%), land use change such as deforestation(18.2%), agriculture (13.5%) and waste disposal (3.6%). Climate change poses risks for the globalenvironment and economic development, with greater risks for people in developing economies whohave the least resources to adapt to its impacts. Terefore climate change is an environmental issue with

implications for the reduction of poverty, sustaining economic growth and preserving world ecosystems.

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Te UNDPs Human Development Report 2007-08 outlined three major strategies for dealing withclimate change and reducing greenhouse gas emissions:

1. Putting a price on carbon emissions and establishing targets for their reduction.

2. Changing peoples behaviour by moving to low carbon technologies and cleaner energy sources.

3. Fostering international co-operation through a new Kyoto Protocol Agreement which has targets,and is led by major polluting advanced countries, which will encourage developing countries toadopt similar policies to reduce their greenhouse gases.

Carbon pollution reduction targets were negotiated at the UN Framework Convention on ClimateChange (UNFCCC) in December 2009 in Copenhagen. However there was widespread disagreementbetween advanced and major emerging and developing countries over the size and timetable for theimplementation of carbon pollution reduction targets under a new Kyoto Protocol agreement.

The International Business Cycle

Changes in the international business cycle have major implications for economic growth anddevelopment in all countries and major regions of the world economy. Changes in world demand willaffect the growth in world output, trade and investment flows. With the majority of world output, tradeand investment accounted for by the rich advanced countries such as the USA, Euro Area, Japan andother advanced economies (such as the NIEs), changes in the US and EU business cycles can affect theinternational business cycle and be transmitted to other countries and regions such as China, India andEast Asia. However with the rise in economic power of large emerging economies such as Brazil, RussiaIndia and China, world output is more balanced and sourced from the three main regions of North

America, Europe and East Asia, rather than from the OECD countries alone.

Table 3.5 shows the growth in GDP for the world economy, advanced, emerging and developingeconomies between 2007 and 2012 with forecasts for 2013-14. It also shows growth rates for majoradvanced and emerging economies such as the USA, Euro Area, Japan, China and India in this period.Between 2006 and 2007 world growth averaged around 5% per annum (refer to Table 3.5) becauseof a global resources boomsourced from China, India and other emerging countries contributing tostrong world growth. Resource exporting countries like Australia, Brazil, South Africa, the RussianFederation and OPEC nations benefited from this boom, largely sourced from Chinas large demandfor resources such as coal, iron ore, metals and petroleum. Growth in the USA, Euro Area and Japan

was also reasonably strong in this period, leading to a strengthening of world trade and investmentflows between the regions of North America, Europe and East Asia. World commodity prices peaked inmid 2008 as the global resources boom reached its height. However loan defaults in the US sub prime

mortgage market developed into a global credit crisis in late 2008, resulting in a higher cost of credit.

Figure 3.11: Greenhouse Gas Emissions by Sector and Activity

Source: World Bank (2008), World Development Indicators 2008, World Bank Washington DC, p123.

Energy related and industrial processes64.7%

Land use change 18.2%

Agriculture 13.5%

Waste 3.6%

Sector

Industry and mining 34.3%

End use/activity

Buildings 15.3%

Transport 13.8%

Deforestation 18.3%

Agriculture and livestock 14.9%

Landfills & other waste disposal 3.6%

Greenhouse gas

Carbon dioxide 77%

Methane 14%

Nitrous oxide 8%

Fluorinated gases 1%

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A Global Financial Crisis(GFC) occurred in 2008-09 and exposed the problem of financial contagionbetween countries and regions as a result of increased economic integration and a lack of regulatoryoversight of the global financial system. Higher oil prices also increased world inflation, and the USAand other major advanced economies started to experience a deceleration in their rates of growth. In2009 the world economy contracted by -0.6%, with the advanced economies contracting by -3.5%,and China and India slowing but still recording positive growth. Te resulting global recession led tolower industrial output and a sharp contraction in world trade and investment in advanced, emergingand developing countries. A global recovery began in 2010 but the Sovereign Debt Crisis in the Euro

Area worsened in 2011-12, and together with large budget deficits and high levels of public debt in

major advanced economies led to a slowdown in the global recovery. Slower growth in the advancedeconomies was transmitted to the economies of China and India which also experienced lower growth.

Table 3.5: World GDP Growth 2007-2014 (f)(%rper annum)

2007 2008 2009 2010 2011 2012 2013 (f) 2014 (f)

World 5.4% 2.8% -0.6% 5.2% 4.0% 3.2% 3.3% 4.0%

Advanced Economies 2.8% 0.1% -3.5% 3.0% 1.6% 1.2% 1.2% 2.2%United States 1.9% -0.3% -3.1% 2.4% 1.8% 2.2% 1.9% 3.0%

Euro Area 3.0% 0.4% -4.4% 2.0% 1.4% -0.6% -0.3% 1.1%

Japan 2.2% -1.0% -5.5% 4.7% -0.6% 2.0% 1.6% 1.4%

Other Advanced Ecs. 4.2% 0.9% -2.1% 4.5% 2.6% 1.4% 1.9% 2.8%

China 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2%

India 10.1% 6.2% 5.0% 11.2% 7.7% 4.0% 5.7% 6.2%

Emerging and 8.8% 6.1% 2.7% 7.6% 6.4% 5.1% 5.3% 5.7%Developing Economies

Source: IMF (2013), World Economic Outlook 2013, April. NB: (f) IMF forecasts for 2013 and 2014.

DEVELOPING, EMERGING AND ADVANCED ECONOMIES

1. List the features of advanced, emerging and developing economies.

2. Discuss the reasons for the differences in economic development between nations.

3. Contrast the economic performance of countries that are globalisers with those that are nonglobalisers.

4. Discuss the regions targeted by the UNDP as suffering a reversal in their HDIs in recent times.

5. Discuss the link between world trade, foreign direct investment and multinational corporations.

6. Discuss the impact of globalisation on global environmental sustainability.

7. Discuss the problems involved in the negotiation of a new Kyoto Protocol agreement.

8. Discuss the impact of the Global Financial Crisis in 2008-09 and the European Sovereign DebtCrisis in 2011-12 on economic growth in major advanced and emerging economies.

REVIEW QUESTIONS

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CASE STUDY OF THE INFLUENCE OF GLOBALISATION ON CHINA

China is currently the worlds second largest economy in nominal US dollar terms and the largestcountry in terms of population size with 1.3b people. In PPP US$ terms it became the worlds secondlargest economy after the USA in 2005. 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.

China has made rapid progress in economic and human development by reforming its economy tobecome more market driven or capitalist in orientation. It has also become very integrated into theglobal economy through international trade and foreign investment. Tis has resulted in sustainedincreases in per capita income, improvements in living standards and a reduction in poverty in China.

China has a socialist economy ruled by a Communist government, which was formed after Mao seungs Communist forces defeated the Nationalists under Chiang Kai Shek in the Chinese civil warof 1949. Under Maos se ungs Communist rule, China attempted to modernise agriculture andindustry in the Great Leap Forwardin the 1950s. Tis policy failed to raise national output and resultedin widespread famine and poverty. In the ensuing Cultural Revolutionof the 1960s, progress towards

modernisation under socialist planning was further retarded by purges of reformers and progressivescritical of Maos failed economic strategy and Chinas isolation from the global economy.

Chinas Economic Reform Strategy

After Mao se ungs death in 1978, his successor, Deng Xiao Ping, implemented a range of radicaleconomic reforms between 1978 and 1997, designed to improve Chinas economic performance, basedon rapid industrialisation and sustaining high rates of economic growth. In 1979 Deng Xiao Ping,Chairman of the Chinese Communist Party, also introduced a one child policy to contain Chinaspopulation growth as part of the broad based reform process:

Agricultural reformsbetween 1978 and 1994 involved the abandonment of the commune system

of agriculture (de-collectivisation) and its replacement by the Household Responsibility System.Tis meant that households could make their own production decisions and sell surplus outputin free markets once the state quota was met. Tis new system led to dramatic increases in foodproduction and surplus income was invested in privately run town and village enterprises (VEs)responsible for the light manufacturing of industrial goods. Tis helped to raise industrial output.

In 1980 an open door policy was adopted towards foreign trade and investment, with SpecialEconomic Zones (SEZs) established in the southern and eastern coastal provinces of China. TeseSEZs attracted foreign investment and MNCs through a range of incentives such as low tax rates,exemption from import duties, cheap labour and power, and less stringent government regulations.rade in exports and imports grew from 10% of Chinas GNP in 1978 to 36% of GNP by 1996.Inflows of foreign capital increased Chinas access to export markets, transfers of Western technology

and management skills, and created substantial employment in Chinas manufacturing sector. In 1994 taxation reformswere introduced by the Chinese government. Tese reforms shifted the

power to collect taxes away from provincial governments to the central government in Beijing,in order to improve the efficiency of tax collection and to finance public infrastructure spending.Tese reforms also targeted tax evasion and avoidance, which were major problems encountered inraising sufficient taxation revenue to meet the central governments spending commitments.

Banking lawswere introduced in 1995, to develop a system of network banking, establish stockexchanges, and promote a more efficient capital market to facilitate saving and investment in China.

In 1992 cuts to tariffs and other forms of protection were used to encourage greater domesticefficiency through direct import competition. Chinas average tariff rate was cut from 32% to 19%

in 1996 and reduced to 15% in 2000. Tese cuts in import protection supported Chinas drive toattract foreign investment and open its domestic market to more foreign competition.

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Economic Growth

China sustained a high rate of average annual growth in real GDP of 9.2% between 1995 and 2004.Te growth rate peaked at 14.2% in 2007 (refer to Table 3.6) but slowed to 9.2% in 2009 due to theimpact of the Global Financial Crisis (GFC) on Chinas exports and inflows of foreign investment.

Te Chinese government responded to the GFC by implementing a US$586b fiscal stimulus packagein November 2008 to maintain a growth target of 8% in 2009-10. Te stimulus package includedinfrastructure projects to rebalance growth from exports to increasing domestic consumption andinvestment. Te Chinese economy recovered in 2010 growing by 10.4%, but fell to 9.3% in 2011 asnatural disasters in Japan and the worsening of the European Sovereign Debt Crisis impacted on Chinasexports. Chinese growth was a modest 7.8% in 2012 as world recovery slowed due to fiscal restraintin the USA and Euro Area. Te IMF forecast a modest 8% growth rate for China in 2013. China hasfollowed a similar path to industrialisation to Japan and the NIEs, based on driving growth throughforeign investment and international trade. Its economy has been transformed in four main ways:

1. China has moved from being a planned or socialist economy to a market or capitalist economy.

2. China has moved from being an agricultural economy to an industrialised economy, and a ruralbased peasant society to an urban based society with a rising middle class .

3. China has moved from being an economy with a domestic focus, to one with a trade orientedfocus, highly integrated with the global economy to capture the benefits of globalisation.

4. China is a major world economic power, contributing substantially to global output, economicgrowth, trade and investment. China also has substantial political and military power.

China has become the second largest economy in the world as measured by the nominal value of GDPin US dollars. On a purchasing power parity (PPP) basis it is also the second largest economy in the

world after the USA. In 2012 Chinas share of global GDP was estimated at 14.9%, its share of worldexports of goods and services was 10%, and its share of world population was 19.5%.

Globalisation has had a profound impact on China with economic growth being sustained between8% and 10% in the 1990s and 2000s. Te main drivers of growth were business investment andnet exports. Investment spending was 45% of GDP in 2006, including private and public spendingon infrastructure. Foreign investment funds are used to finance export industries, enabling China toachieve a large current account surplus which was 2.6% of GDP in 2012. China has large foreigncurrency reserves which were US$3,443b in 2013 and it is a net lender of capital to the rest of the world.

Table 3.6: Selected Economic Indicators for China 2007 to 2013 (f)

2007 2008 2009 2010 2011 2012 2013 (f)

Population (billions) 1.33 1.33 1.33 1.33 1.34 1.34 1.35

Nominal GDP (US$b) 3,494 4,520 4,990 5,930 7,322 8,227 9,020Real GDP PPP (US$b) 7,330 8,214 9,049 10,128 11,305 12,405 13,623

Real GDP (% growth per annum) 14.2 9.6 9.2 10.4 9.3 7.8 8.0

Unemployment (urban % pa) 5.2 4.2 5.3 5.4 5.6 4.3 4.1

Inflation (CPI % growth pa) 4.8 5.9 -0.7 3.3 5.4 2.7 3.0

Current Account (% of GDP) 10.1 9.3 4.9 4.0 2.8 2.6 2.6

Exchange Rate (RMB/US$) 7.30 6.83 5.54 6.83 6.45 6.52 6.10

Interest Rates - official (% June) 6.7 6.1 4.1 5.3 6.3 6.5 6.0

Sources: IMF (2013), World Economic Outlook, April and DFAT (2013), Fact Sheet on China www.dfat.gov.au.

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Economic Development

With rapid economic growth of about 8% in average real terms per annum over the last few decades,China has experienced a substantial reduction in poverty. Te World Bank estimates that over the last25 years poverty has been reduced by 400 million people in China, previously living on one US dollar

per day. Between 1990 and 2001 the reduction in income poverty in China was most rapid, with theincidence of people living below the international poverty line of US$1 a day, falling by 130 million.

Chinas rapid rate of economic growth in the 1980s, 1990s and 2000s has been based on an exportoriented strategy financed by direct foreign investment. Chinas economy doubled in size in the decadesof the 1980s and 1990s. Tis has resulted in rising real incomes and significant improvements inmaterial indicators (such as real GDP per capita) and non material indicators of development (such aslife expectancy and literacy) for much of the Chinese population. Table 3.7 provides a summary ofsome of the major material and non material indicators of Chinas progress in economic development.

Table 3.7: Selected Indicators of Chinas Economic Development (*HDI Indicators)

Population 2012 (millions) 1,354.0m

*GDP US$b 2012 US$8,227.0b

Annual Growth in GDP pc (%) 1995-2004 9.2%

GDP pc (US$) 2012 US$6,076

GDP pc PPP US$ 2012 US$9,162

Annual Rate of Inflation (%) 2012 2.7%

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$1,990,660m

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$1,808,760m

Imports of Goods and Services as a % of GDP 2011 27%

Net Direct Foreign Investment Flows 2011 (US$) US$280,072m

Current Account Balance 2012 (US$b) US$213.7b

*Adult Literacy 2005-2011 (%) 94%

Doctors per 1,000 people 2006-2011 1.8

*Life Expectancy at Birth 2012 (years) 73.7 years

Population Below Poverty Line (of US$1.25 a day) 2008 13.1%

Human Development Index Value 2012 0.699

Human Development Rank 2012 (out of 187 countries) 101st

Sources: UNDP, (2013), Human Development Report 2013, Palgrave Macmillan, New York.

World Bank (2013), World Development Indicators 2013, Washington DC. Fact Sheet on China www.dfat.gov.au.

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Income and Quality of Life Indicators

Table 3.8 illustrates Chinas progress in the three indicators that comprise the UNDPs HumanDevelopment Index (HDI): life expectancy at birth, the mean years of schooling and Gross NationalIncome (GNI) per capita. Life expectancy in China rose from 63.2 years in 1975 to 73.7 years in 2012.

Te mean years of schooling and adult literacy (94% in 2011) also rose, and GNI per capita (in PPPUS$ terms) grew by an annual average of 8.2% between 1975 and 2012 to reach US$7,945 in 2012.

Table 3.9: Trends in Chinas Human Development Index from 1980 to 2012

1980 1990 1995 2000 2005 2010 2011 2012

0.368 0.460 0.518 0.567 0.616 0.663 0.687 0.699

Source: UNDP (2013), Human Development Report 2013, Palgrave Macmillan, New York.

Table 3.8: Chinas HDI Indicators in 2012

Life Expectancy at Birth Mean Years of GNI per capita HDI

Schooling (PPP US$)

73.7 years 7.5 years US$7,945 0.699


With such improvements in economic and human development, Chinas HDI value rose from 0.368in 1980 to 0.699 in 2012 as illustrated in Table 3.9. In 2012 China was ranked 101st out of 187countries in the UNDPS HDI list. Chinas annual HDI growth was 1.4% between 2000 and 2012.

Despite the improvements in human and economic development in China in recent decades, 13.1% of

the population in 2008 was classified by the World Bank as being below the international poverty lineof US$1.25 per day and 29.8% below an income of US$2 per day. Tis partially explains the migrationof people in China shown in Figure 3.12,with large flows of migrants from inland provinces with lowHDI values to coastal provinces with the highest HDIs and income and employment opportunities.

Figure 3.12: Inter-Provincial Migration Flows in China 1995-2000


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Distribution of IncomeChinas impressive growth performance has not benefited all of its provinces equally. Large geographicdisparities in the distribution of income remain across provinces. Tese differences exist on two bases:

1. Per capita incomes are higher in urban areas in the east and south of China, compared to the ruralareas in the north and west of the country; and

2. Per capita incomes are higher in the southern coastal provinces of China compared to the north,and in the eastern coastal provinces, compared to the western provinces.

China is one of the few countries in the world performing well overall in the indicators for the UNsMillennium Development Goals. Yet in recent decades, China has shown large disparities in economicand social outcomes between coastal and inland regions, a trend that reflects the differences betweenurban and rural areas. Coastal areas have consistently experienced the fastest economic growth andrising incomes because of their proximity to the Special Economic Zones such as Beijing, ianjin,Guangzhou, Shanghai and Shenzen, where employment and income opportunities are greatest.

Moreover the performance of coastal areas sped up in the 1990s, with annual growth averaging 13%,which was five times the level in Chinas slowest growing north western regions such as ibet andXinjiang. As a result, the bulk of national income is concentrated in metropolitan and coastal regions.

Figure 3.13shows the dispersion in GDP per capita levels across Chinese administrative units in 2000.Te wealth of coastal areas with large ports and harbour cities is derived from industry, trade andexports. In 1999 Chinas three richest cities, Shanghai, Beijing and ianjin were at the top of the HDIrankings and those at the bottom were all western provinces. Moreover the poorest provinces hadthe greatest inequality. For example, ibet had the lowest values for educational attainment and lifeexpectancy. In income, education and health, only some parts of China will achieve the MillenniumDevelopment Goals by 2015, leaving behind the vast inland areas of the western provinces which theChinese government has targeted with large scale development projects to lift per capita incomes.

Figure 3.13: Geographic Distribution of Income in China in 2000

Source: UNDP (2003), Human Development Report 2003, Oxford University Press, New York, p62.

Tianjin

Shanghai

Hong Kong

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Chinas International Trade

In 2012 China accounted for 14.9% of global GDP and 10% of world exports of goods and services.China became the second largest goods trading nation in the world after the USA in 2010. Te expansionin Chinas exports and imports between 2005 and 2010 is shown in Table 3.10, with exports valued at

US$1,577b and imports at US$1,394b in 2010. Chinas exports grew by an average of 20% annuallybetween 2005 and 2010, outstripping the growth in imports, resulting in a trade surplus of US$183.1b.Since 1994, 65% of the Chinas export growth has come from Western companies that have directlyinvested in China, with multinational corporations (MNCs) accounting for around 54% of Chinastotal exports. Manufactured goods accounted for 93% of Chinas merchandise exports in 2011.

Chinas imports and exports are both dominated by manufactured goods, with intermediate manufacturedgoods, including machinery and transport equipment, comprising a higher share of imports thanexports. Tis reflects the role that China plays in the processing of high value added goods, includinginformation and communications technology (IC) equipment. Chinas export success has also beenassisted by an undervalued currency. Te 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 worldmarkets. However under pressure from the USA in 2005 (because of its large trade deficit with China),the Chinese government revalued the RMB and adopted a managed peg arrangement for its exchangerate but there is growing international pressure for China to adopt a floating exchange rate mechanism.

Chinas top exports in 2010 were electrical machinery and equipment, power generation equipment,apparel, iron, steel, optics, medical equipment, furniture, chemicals, ships and boats, motor vehicles,plastics, footwear and toys. China is a major importer of raw materials, energy and capital goods.Its major imports in 2010 were electrical machinery and equipment, mineral fuels and oil, powergeneration equipment, metal ores, optics and medical equipment, plastics, chemicals, iron and steel.China accounts for around 10% of the worlds consumption of resources. In 2005 China accountedfor 25% of the world demand for steel, 35% of the world demand for iron ore and coal, and 20%of the world demand for aluminium, copper and zinc. Te GFC in 2008-09 reduced Chinas rate ofeconomic growth, exports and imports, but these recovered in 2010 as global economic conditionsimproved including international trade. However a slowdown occurred in 2011-12 with a fall inexports due to the impact of the European Sovereign Debt Crisis on world growth.

Chinas major trading partners are listed in Table 3.11for exports and imports in 2010. Major exportmarkets include the USA, Hong Kong, Japan, South Korea, Germany, the Netherlands, India, theUK, Singapore and Italy. About half of Chinas exports are sold in the Asian region, with other majorexport markets in North America and Europe. Asian countries such as Japan, South Korea, aiwan,Malaysia and Tailand are major sources of imports, along with resource exporters such as Australia,

Brazil and Saudi Arabia. Te USA and Germany are also major sources of imported capital goods.

Table 3.10: Chinas Exports and Imports 2005 to 2010

2005 2006 2007 2008 2009 2010

Exports (US$b) 762.0 968.9 1,217.8 1,430.7 1,201.6 1,577.9

Annual % change 28.4 27.2 25.7 17.5 -16.0 31.3

Imports (US$b) 660.0 791.5 956.0 1,132.6 1,005.9 1,394.8

Annual % change 17.6 19.9 20.8 18.5 -11.2 38.7

Trade balance (US$b) 102.0 177.4 261.8 298.1 195.7 183.1

Source: The US-China Business Council (2011),Chinas World Trade Statistics, www.uschina.org

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China Membership of the WTO

China was admitted as a member of the WO at the Doha Conference in 2001 and became the143rd member of the 146 nation WO. Chinas admission to the WO reflected its status as aneconomic superpower and opened its huge domestic market of 1.3b people to global exporters, as wellas increasing Chinas access to other countries markets. Greater access to world export markets through

WO membership will help Chinas future growth and development by achieving three goals:

1. Diversification of its export base to include more value added EM and service exports.

2. Attracting more foreign investment into the service sector of the Chinese domestic economy.

3. Encouraging more innovation and the use of IC in the Chinese domestic economy.

Te gains to China of WO membership (through higher trade volumes) must be balanced againstthe costs of higher unemployment and structural change in domestic industries, which are facing moreimport competition such as retailing, banking, finance, telecommunications and motor vehicles. Chinamust also abide by the rules for free and fair trade set down by the WO, including adherence toagreements on intellectual property rights (such as copyright, patents, licence fees and royalties).

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 movedto a managed peg against a basket of selected currencies of Chinas major trading partners. Tis was aresponse to criticisms that China had given its export and import competing firms an unfair advantage in

world trade, because the RMB was undervalued, making Chinese exports and import substitutes moreinternationally competitive. Te revaluation of the RMB was small, amounting to a 2% revaluation,

with its US dollar exchange rate moving from 8.3 RMB to 8.1 RMB to the US dollar.

Zhou Xiaochuan, head of the Peoples Bank of China, indicated that currencies of Chinas major tradingpartners would be used in the basket to determine the value of the RMB: the US dollar, euro, Yen,Korean won, Singapore dollar, British pound sterling, Malaysian ringgit, Russian rouble, Australiandollar, Tai baht and the Canadian dollar. Te new exchange rate arrangements provide China withmore flexibility in setting its exchange rate, and assists the Peoples Bank of China in controlling Chinasdomestic monetary conditions and inflation in goods and asset markets. Daily fluctuations in the RMB

are contained to a narrow band of around plus or minus 0.3% against the US dollar. However with itslarge trade surplus China is under growing pressure from the USA and EU to float the RMB.

Table 3.11: Chinas Major Export Markets and Sources of Imports in 2010

Country Exports Country Imports

1. USA US$283.3b 1. Japan US$176.7b

2. Hong Kong US$218.3b 2. South Korea US$138.4b3. Japan US$121.1b 3. Taiwan US$115.7b

4. South Korea US$68.8b 4. USA US$102.0b

5. Germany US$68.0b 5. Germany US$74.3b

6. Netherlands US$49.7b 6. Australia US$60.9b

7. India US$40.9b 7. Malaysia US$50.4b

8. United Kingdom US$38.8b 8. Brazil US$38.1b

9. Singapore US$32.3b 9. Thailand US$33.2b

10. Italy US$31.1b 10. Saudi Arabia US$32.8b

Source: The US-China Business Council (2011),Chinas World Trade Statistics, www.uschina.org

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Trade and Investment

Te value of Chinas exports grew by 31% in 2010 and exports accounted for 31% of GDP in 2011.Much of the growth in exports reflected the expansion in the processing of goods that have been importedfrom other countries. Imports accounted for 27% of GDP in 2011 and whilst some of the imports have

been subject to value adding and re-export, the rest of Chinas imported goods have been for domesticuse. Tis reflects the growing importance of domestic demand as a future source of Chinese growth,especially after the impact of the Global Financial Crisis in 2008-09 and the European Sovereign DebtCrisis in 2011-12 in reducing export growth. Domestic demand includes household consumption andbusiness investment, which finances the growth in Chinas productive capacity through the following:

New factories, industrial complexes and technology parks;

Retail shopping malls and centres; and

Commercial oce complexes and residential development, including apartments and houses.

Data on the components of GDP show that Chinese domestic demand grew at an annual rate of14% between 2003 and 2008, compared with growth of 15% in nominal GDP in the same period.

Importantly annual investment growth averaged 19% over this period and investment is estimated tonow account for 40% of Chinas nominal GDP.

Te growth in investment in China appears to be broadly based across primary, secondary and tertiarysectors (see Table 3.12). Whilst investment in manufacturing was 12% of GDP in 2006, much ofthis was development related, through increased infrastructure, buildings, water and environmentalmanagement systems. A large share of infrastructure investment was for the construction of extensivesubway systems in Chinas growing cities, and inter-provincial highways to facilitate the movement ofgoods and people. Recent surveys of urban fixed asset investment suggest the following trends:

25% of urban investment was in infrastructure, utilities, water and environmental management.

25% of urban investment was in the real estate sector, including housing construction and landpurchase.

Investment in urban areas has been a result of the rapid increase in urbanisation in China. Te RMB4 trillion fiscal stimulus package announced by the Chinese government in the second half of 2008 tocounter the GFC was aimed at boosting public infrastructure investment to support economic growth.

Table 3.12: Investment Expenditure in China 2004-06 (% of GDP)

2004 2006

Total Investment 37% 43%

Primary Industry 1% 1%

Secondary industry 14% 18% - Manufacturing 9% 12%

- Utilities 3% 4%

- Other 2% 2%

Tertiary Industry 22% 24%

- Real estate 9% 10%

- Infrastructure 4% 5%

- Water and environment 3% 3%

- Other 6% 6%

Source: Reserve Bank of Australia (2007), Bulletin, November.

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Foreign Direct Investment and Multinational Corporations in China

Foreign direct investment (FDI) in China remains a key driver of Chinese economic growth, althoughcapital flows fell during the GFC in 2008-09. Te Chinese government has extensive capital controlsin place to encourage foreign direct investment rather than portfolio investment. China attracts record

levels of foreign direct investment, as companies continue to shift production to major Chinese cities(such as Beijing, Shanghai, Guangzhou and Shenzen) to take advantage of the cheap labour market,as factory wages average less than 5% of those in the USA. otal foreign direct investment was valuedat US$116b in 2011 (refer to Table 3.13), a large rise of 28.8% from the US$90b recorded in 2009.

China surpassed the USA to become the top recipient of foreign direct investment in 2002. Multinationalcorporations (MNCs) locate in China to manufacture goods for export markets and for sale to Chinasgrowing and increasingly affluent middle class in cities such as Beijing, Hong Kong SAR, Shenzen,Guangzhou and Shanghai. Te main sources of direct foreign investment in China are from HongKong, aiwan, Japan, Singapore, the USA, South Korea, the UK, Germany, Macao and Canada.

Table 3.13: Foreign Direct Investment in China in 2011

Type of Project Number of Projects Utilised FDI Value

Equity joint ventures 5,005 US$21.4b

Co-operative joint ventures 284 US$ 1.8b

Wholly foreign owned enterprises 22,388 US$91.2b

Foreign venture capital 35 US$ 1.6b

Total Foreign Direct Investment 27,712 US$116.0b

Source: The US-China Business Council (2011),Foreign Investment in China.

In 2011 foreign direct investment in China totalled US$116b (refer to Table 3.13), with the majorityin wholly foreign owned enterprises (US$91.2b) and equity joint ventures. Foreign direct investmentflowed into China as it implemented the majority of its World rade Organisation (WO) commitmentsto open up its domestic market to free trade in 2007. Te opening of the domestic market to foreigncompetition in 2007 and the surge in foreign investment associated with the Beijing Olympics in 2008helped to support high growth in domestic consumption and investment in the Chinese economy.

Environmental Sustainability

China has sustained average rates of economic growth of between 6% and 8% for the past two decades.Tis rapid rate of economic growth has led to a high level of resource use and environmental degradation.

China is therefore experiencing severe environmental problems associated with resource depletion andenvironmental degradation. Te Chinese government commissioned the OECD to conduct a study ofthe environment in 2007. Te report found that unless pollution is controlled, by 2020 it will cause600,000 premature deaths in urban areas and 20m cases of respiratory illness per year. Te report alsofound that up to 7% of Chinas annual GDP is lost because of pollution, and this could rise to 13% ofGDP if stronger environmental laws are not implemented and enforced.

Chinas carbon dioxide emissions were 7,687 million metric tonnes in 2009, 45% higher than the USA,mainly sourced from electricity and cement production. Figure 3.14 shows Chinas contribution of20% to total global carbon dioxide emissions in 2006. Although the high income OECD countriesaccounted for 40% of global carbon dioxide emissions in 2006, developing countries such as China andIndia are responsible for an increasing share of the world total. In Chinas case it is due to over 70% ofits electricity being sourced from coal fired power stations which pollute its environment.

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Tis is also reflected in Chinas rising per capita carbon dioxide emissions (see Figure 3.15), which were3.2 metric tonnes in 2003, compared to 19.9 metric tonnes in the United States, 10.3 metric tonnes inthe Russian Federation and 1.2 metric tonnes in India.

As many as 300m people are estimated by the OECD to be drinking contaminated water every day in

China. Other environmental problems in China include the following:

Loss of natural grasslands and forests because of the expansion of agriculture and industry.

Loss of topsoil and subsequent desertication due to the removal of vegetation. Tis has causedsevere levels of erosion and the loss of topsoil in farming regions during sandstorms.

Loss of lakes and wetlands has resulted in Chinas total area of lakes shrinking by 15% since the1950s, while its wetlands have shrunk by 26%.

Shortages of water due to drought and the loss of water due to inecient irrigation systems. Chinasmajor cities also face water shortages due to excess demand and the lack of available water supplies.Te Chinese authorities have completed dam building projects such as the Tree Gorges Project toovercome water shortages and to generate additional hydro electric power.

Inadequate disposal of household and industrial wastes, as estimates suggest that only 20% of solidwaste per year is properly disposed of in China, and only 10% of sewage is treated, with the restdumped straight into lakes and rivers causing water pollution.

Severe levels of air pollution, with China having the worlds highest emissions of sulphur dioxide,emitting 17 million metric tonnes per year. Chinas carbon dioxide emission levels are also amongstthe highest in the world with 70% of Chinas energy needs supplied by coal fired power stations andcoal based home heating.

A high incidence of respiratory diseases, with China having the worlds highest rate of chronicrespiratory disease. Te outbreaks of SARS and bird flu occurred in 2003 and 2005 in China dueto pollution and a lack of health and hygiene standards in both rural and urban areas.

Te Chinese government has begun to recognise and address the environmental problems that haveemerged because of its rapid economic growth and industrialisation. argets have been set for pollutionlevels and there is a policy to move away from a reliance on coal fired power generators to using morehydroelectric and nuclear sources of power. A market has also been established for tradable emissionpermits, giving firms an incentive to reduce their pollution levels by trading excess rights in a market.

Figure 3.14: Shares of Global CarbonDioxide Emissions in 2006

Source: World Bank (2010), Word Development

Indicators 2010, World Bank, Washington DC.

Figure 3.15: Per Capita Carbon DioxideEmissions of the Five Largest Producers1990-2003

Source: World Bank (2007), World Development

Indicators 2007, World Bank, Washington DC.

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Te Chinese government has also banned the logging of domestic timber since 1999 and tightened itsenvironmental legislation by passing a law on Environmental Impact Assessment in 2003, which nowapplies to all new development projects. China increased its spending on environmental protectionfrom 0.8% of GDP to 1.3% of GDP, under the countrys tenth Five Year Plan which ran from 2001to 2005. Tis was a positive development in Chinese environmental policy, since the World Bank

estimates that pollution alone costs China between 8% and 12% of its GDP annually, in direct damageto the environment from acid rain on crops; medical costs and lost output from respiratory illnesses;money spent on disaster relief following typhoons and floods; and the implicit costs of the depletion ofnatural resources. China attended the UNFCCC in 2009 in Copenhagen but failed to agree with otheradvanced and developing countries on the size and timing of global pollution reduction targets as partof a framework for the implementation of a new Kyoto Protocol in 2012.

Evaluation of Chinese Government Economic P

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