Topic 1 – The Global Economy

Undertake a case study of the influence of globalisation on an economy other than Australia, including an evaluation of the strategies used to promote economic growth and development in this economy.

First, what is globalisation?The increased integration of economies

around the world leading to the development of a global market place.

It is the cross-border flows of trade, investment, technology, finance and labour between economies.

Distinguish between economic growth and development.

What is economic growth?

What is economic development?

An increase in the level of real GDP and productive capacity overtime.

The structural changes needed in the economy for sustainable economic growth to occur.

Case Study:The Socialist Republic of Vietnam

Source: picasaweb.google.com

Source: commons.wikimedia.org

Source: commons.wikimedia.org

The Socialist Republic of Vietnam:Economic history

Communism: Centrally planned economy(little to no growth, famine, isolation)

↓Socialist orientated market economyEconomic convergence with globalisationBenefits and challenges

1986: ‘doi moi’ (renewal) policyFirst steps towards a market economy

De-collectivisation of agricultural landFreeing up of agricultural pricesBasic property rights for farmersImprove efficiency and manage

famine crisis

Decentralisation of governmentMore power to individual govtsIncreased competition between

local govts – more efficient.

Source: commons.wikimedia.org

Business sector reformRemained highly centralised until 2000 when private

enterprise was legally recognised.Special economic zones. Incentives for domestic

exporters and foreign investment.Provision of better infrastructureImport duty exemptionsReduced corporate taxesLower land and labour costs

Source: tapbusinessdevelopment.co.uk

Trade and Trade agreementsVietnam began to enter into bilateral and multilateral

trade agreements.Bilateral: US and EU1995 ASEAN2007 WTOWTO agreements:

↓ in average tariff rates 17.4% to 13.4% over 5-7yrs

Lifting of import quotasSmaller ↓ in agricultural tariffs (23.5% to 21%).

So that poorer farmers were still protected.

Source: library.thinkquest.org

Source: wto.nciec.gov.vn

Effects of industry, government, and trade reforms.

Merchandise trade as a percentage of GDP increased from 96.6% in 2000 to 162.1% in 2007

Between 1995 and 2005, the share of agriculture in GDP ↓

from 27% to 21%manufactures ↑ 29% to 41%Role of SOE in manufacturing

has fallenFDI flows increased from

$US 1,400m in 2002 to $US 9,065 in 2008

Source: commons.wikimedia.org

Effects of Globalisation:Economic Growth and FDI

Vietnams GDP (PPP): (US$b) 255.8Average growth rate of Real GDP (1995-2005): 7.3% Average growth rate of Real GDP per capita: 6.2%N.B: Gross domestic investment as

a percentage of GDP ↑ from 33.2% in 2002 to 40.4% in 2007 with the national savings rate closely following suit.

Source: The Economist, Apr 24 20008

Effects of Globalisation:Quality of life and income distribution indicators

Human Development Index ↑ 0.561 to 0.725 (1985-2007)

Percentage of population below international poverty line58.1% 12.3% (1993-2009)

Gini coefficient 0.34 to 0.36 (93-06)Good, but improvements still needed

5 year Socio-Economic

Development Plan 2006-2010Source: flickr.com

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Did the Vietnamese economy overheat?Significant credit growth and increase in property prices inflation - 6.7% between 2002 and 2007 BUT 28% in August 2010.

Inflationary pressure from maintaining value of the Vietnamese Dong, pegged to the $US

Government response:Revised growth target from 9% down to 7%Cutting government expendituresContractionary monetary policyXR allowed greater flexibility

Effects of The International Business Cycle: GFC

Slowdown in US and EU economy – Vietnam’s two largest export markets.

Exports ↓ But Imports continued to ↑Growing current account deficit

-11.9% of GDP in 2008Value of FDI ↓ by 82%Economic growth slowed to lowest

rate in nine years, 6.2%.

Source: The Economist, Sep 24th 2009

Government ResponseIncreased government expenditureInterest rate subsidy for domestic exporters

to protect local employment

Increased spending has also increased the level of public debt, but it is still considered to be sustainable.

Environmental SustainabilityAnother challenge of globalisation.World Bank identifies CO2 emissions and water quality as

two major issues in Vietnam.What are possible costs of these negative

externalities?Social and health costsLoss of production due to illnessLoss of crops due to air quality

But so far, not a major concern of government policy – While spending on science, technology and the environment has increased, it still only represents a small fraction of total government expenditure.

2006-2010 Socio-Economic development plan environmental goals so far not achieved.

Source: flickr.com

Source: picasaweb.google.com

Future DirectionsFocus at the moment is short-term policy to reverse

effects of GFC.Longer term focus may be needed:

Micro economic reform Further decentralisation of government and deregulation of

industry Investment in infrastructure, health, educational and

environmental reform.Need to further improve

productive capacity and competitiveness.

Source: flickr.com