Comparison Of Growth Rates Between US And China Essay

Question:

Discuss about the Comparison of Growth Rates Between US and China.

Answer:

Introduction

This write-up shall focus on the economies of the Unites States of America and China. The economies of these two nations have been termed as the strongest in the world. The United States has been the largest economy of the world boasting of about 22% of the global GDP. However, based on purchasing power parity (PPP), the International Monetary Fund (IMF) has ranked China ahead of the US.

Literature review suggests that the makeups of the two nations’ economies are totally different. The United States is a refined and highly varied economy that focuses on services, finance, and consumption. China has aspirations to attain the characteristics of the US economy in the future, but at the moment, the Chinese economy is characterized by the country’s manufacture with policies having been adopted to transition into a consumer-driven economy.

In this write-up, the growth rates of the two nations for the past ten years shall be presented and possible reasons for the variations in growth shall be discussed. Further, the trade structures, exports, economic policies, fiscal policies, monetary policies, and the exchange rate policies of the two countries, which in the long-run have a direct impact on the respective countries’ growth rate, shall also be summarily analyzed.

Finally, the challenges faced by the two nations in enhancing growth rates for the stated period shall be discussed.

US Growth Rate

Information on the growth rate of the United States’ Gross Domestic Product (GDP) can be sourced from the Bureau of Economic Analysis (BEA). The BEA produces quarterly releases of economic statistics that comprehensively provide an up-to-date presentation of the status of the US economy. The figure below represents the yearly growth rate between 31st December 2016 and 30th June 2016 as represented by Voudrie (2015):

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

% Growth

1.8

-0.3

-2.8

2.5

1.6

2.3

2.2

2.4

3.00

2.44

Table 1.1: Percentage yearly growth rate

Analysts argue that the world’s leading economies have been experiencing stagnated or relatively reduced growth rates. The US economy has itself been steadily declining from a growth rate of over 4 percent in the 1950’s to below 2 percent in the last decade At a glance, from the table above, the annual growth rate can be estimated at 1.5 percent. Voudrie (2015) argues that even though the financial crisis of 2008 had a great impact on the whole world, the U.S economy’s growth rate is far below the government target of 3-3.5% annual growth rate.

China Growth Rate

In China, information on the growth rate of the GDP is produced quarterly by the National Bureau of Statistics of China. The table below summarizes China’s GDP growth rate between 2007 and the first quarter of 2016 as represented by the Trading Economics and information in Chinability.com:

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

% Growth

14.2

9.6

9.2

10.6

9.5

7.7

7.7

7.3

6.9

6.7

Table 1.2: Percentage yearly growth rate

From the table above,there is evident that the annual growth rate of the economy of China has been gradually reducing but it remains high and meets the government targets of 6 to 6.5%.

Reasons for the Variations in Growth Rates

In the United States, the period before 2007 was characterized by low economic growth. This was partly because of the 2000 dot-com bubble burst which led to a sharp drop in economic activities. A further dent to the economy was suffered following the 2001 terrorist attack that has come to be known as 911. These incidents significantly halted major economic activities in the US economy.

In a bid to counteract the negative economic effects, the Federal Reserve introduced low-interest rates, an action that has been criticized as a catastrophic move which played a major contributory role in the housing bubble of 2007 which subsequently precipitated into the Great Recession of 2008. This explains the low economic growth rates between 2007 and 2009 from which the US has been progressively recovering.

For the case of China, the economic growth is characterized by substantial growth but the annual growth rate has steadily declined. In 2000, due to massive increases in manufacture and consumption rates, massive investment, and increases in export, the economy of China experienced exponential growth rates. In 2002, President Jintao’s administration adopted policies that were aimed at bridging the economic gap between the coastal cities which were flourishing from the economic growth and the countryside which had not seen much development. Subsidies were increased while agricultural taxes were reduced and the previous regime’s privatization of government assets was also reduced. The government also adopted various favorable monetary policies and by the time the 2008 global financial crisis hit, China managed to sail though with ease especially after the government pumped in finances to help stabilize the economy.

In 2012, President Jinping’s administration adopted policies that brought about reforms to ensure a sustainable growth model. This mode was a move away from the previous policies that supported economic development at all costs regardless of the impacts. As a result, the economy’s growth rate has steadily declined although it still grows at relatively high rates compared to the U.S.

Having noted the foregoing, this article shall discuss the trade structures, exports, economic policies, fiscal policies, monetary policies, and the exchange rate policies of the two countries which in the long-run have a direct impact on the respective countries’ growth rate:

Trade Structures

The US is a leading importer of goods and services and a 2nd leading exporter in the same respect. The US plays a major role in the international markets due to its advocacy for the eradication of trade barriers and adoption of Free Trade Agreements (FTAs). The US has managed to negotiate numerous such agreements and is also a World Trade Organization (WTO) member. These provide a market for its products under favorable market terms that foresee the accumulation of profits.

Comparably, China is a leading manufacturer due to the government’s massive investment programs. Further, in 2001, China became a WTO member. These factors saw the massive trade growth especially in 2001. Trade was, however, impacted in 2008 due to the recession which was characterized by reduced economic activity that affected the output of the manufacturers.

Exports

The United States mainly exports high-valued goods among other things machinery, airplanes, and motor vehicles. In 2013, goods valued at USD 1.579 Trillion were exported from the US. The country is the leading exporter of services with a record high of USD 622 Billion in 2013. In China, exports mainly include electronics and machinery, and they amounted to USD 2.2 Trillion in 2013.

Economic Policy

To reverse the effects of the 2008 recession, the US government implemented various regulations to govern the economic and financial activities of the state. There has since been more oversight in the financial sector mainly as governed by the Dodd Frank Act of 2010.

In China, the government had adopted policies that allowed integration into the global economy and support for economic activities all costs. These policies brought about severe economic imbalances in addition to environmental degradation. Further, demographic policies have been said to affect the workforce market severely. As a result, the Chinese government in 2013 embarked on economic reforms to promote market-oriented reforms and the development of better fiscal policies.

Fiscal Policy

Reports have it that the US government spends more than it collects from revenues and thus has been suffering fiscal deficits for several decades. In 2009, due to the aftermaths of the financial crisis, the deficit hit the highs of 9.8% of the GDP but dropped to 4.0% in 2013.

Up to 60% of the US government’s expenditure is managed by statutes which allocate the money to various entitlement programs while the remainder is discretionarily spent on various government programs and public service with a greater percentage being allocated to defense programs.

In China, the government launched fiscal reforms in 1994 to reduce the tax/GDP deficit ratio. The reforms brought about steady increases in revenues which amounted to 22.7% of the GDP in 2013. The new system, however, left local governments few sources of revenue and they were therefore forced to rely heavily on indirect borrowing to finance their activities. By the end of 2013, local governments owed debts of up to USD 3.0 trillion (33% of the GDP). To provide for the need for revenue, amendments to budget laws were passed by Congress allowing direct issuance of bond by the provincial government.

Monetary Policy

The United States’ Federal Reserve was mandated to promote maximum employment and price stability. The Federal Reserve’s policymaking body is charged with keeping an outlook for the US economy and formulating different policy options and governing interest rates. The Federal Reserve’s funds rate is used by deposit banks as an interest rate between themselves in overnight transactions. This rate helps maintain the reserve balance requirements.

For China, the People’s Bank of China is charged with similar duties as the Federal Reserve. It functions include the formulation and implementation of monetary policy, resolution of economic risks, regulation of exchange rates, and ensuring price stability.

Exchange Rate Policy

The Treasury Department in the US is mandated to supervise international financial matters. On issues involving foreign exchange, the Treasury is required to make decisions in consultation with the Federal Reserve. However, the US is unlikely to interfere in foreign exchange markets, and the exchange rates are therefore determined by the foreign exchange market and the domestic monetary policies.

In China, the People’s Bank adopts a floating exchange rate which is based on supply and demand with reference to various predetermined currencies. The Yuan id freely convertible under China’s current account but under the capital account, it is strictly regulated by the People’s Bank policies.

Challenges Faced in Enhancing Growth Rates

For the case of China, the country has experienced rapid development which has attracted attention from various quarters. It is thus imperative to understand the country’s path towards the great developments and most importantly the challenges faced in enhancing its growth rates.

Morrison (2013) analyzes various challenges which he argues endanger the Chinese economy. In the first instance, he argues that the government is overly involved in industries through its policies and through State-Owned Enterprises (SOEs) which dominate various sectors. The fact that the SOEs are shielded from competition makes in unfavorable for investment in the sectors that they dominate.

Secondly, there is an increase in National debt whereby SOEs receive preferential loan advancements because the government considers them central to economic development. Many at times, the SOEs fail to settle the loans, and this adds to the Banking System’s nonperforming loans which are shouldered by the government.

The third challenge is caused by the inefficient financial systems such as the Stock Exchange. Due to government dominance, shareholders in companies have no influence in the companies’ activities. As a result, they opt for short-run stock price movements whereby money in borrowed to stock. An example of this trend was in 2015 when it was speculated that returns would be high from stocks and therefore a lot was borrowed to buy stocks. There resulted in a stock bubble and thereafter stock indexes significantly plummeted, resulting in a loss that forced the government to intervene by spending about USD 235 billion to stabilize the market.

Finally, there are environmental and demographic challenges. The growth model adopted by China focuses heavily on industrial produce which in turn results in high levels of industrial pollution; posing catastrophic health hazards. With regards to demographic challenges, it has been argued that policies such as the one-child policy have impacted the economy negatively. A report by McKinsey Global Institute highligted that China’s fertility rate fell from 5.8 to 1.6 births per woman between 1964 and 2012. This will affect the size of the workforce that was initially available in China (Woetzel, J et al, 2009).

For the case of the United States, the growth rate of its economy has also been subjected to its share of changes that have impacted the growth rate for the past decade. For instance, in 2007, the economy suffered a setback from the recession from which it has since been recovering.

The events leading to the recession included a mix of various factors such as lax government policies which made it easy to offer low-interest rates which in turn opened doors to the acquisition of debts, widespread mortgage lending, and excessive risk taking by the financiers. As a result, there was overinvestment in real estate which led to a housing bubble which soon busted leading to a collapse in the economy. To stabilize the economy, the government had to spend over USD 700 billion to stabilize affected corporations and purchasing the affected mortgages.

Conclusion

From the foregoing; it is notable that the YS economy was worst hit during the 2008 financial crisis. This economy has experienced stagnated growth rates and has failed to meet the government targets of 3% to 3.5%. The economy has been affected by two financial crises: the dot-com crises of 2000 and the housing market crisis of 2007 in addition to the 911 terror attack. The 2007 crisis was an aftermath of efforts aimed to subvert the economic effects of the 2000 crisis by reduction of interest rates. This has in fact been considered one of the major challenges for the economy the past decade.

For the case of China, its economy has been significantly growing and meeting the government targets of 6% to 6.5%. However, due to the adoption of reform, policies that focused only on growth have been abandoned, and there is a move towards a consumer-driven economy. As a result, the annual growth rate had steadily declined to 6.7% in 2016 from 14.2% in 2007.

The Chinese economy faces more challenges compared to the US economy which includes huge national debts, inefficient financial systems, environmental challenges and demographic challenges as discussed above.

References

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GDP Growth by Country. (2016). WorldAtlas. Retrieved 22 September 2016, from

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Voudrie, J. (2015). Past 10 Years Of U.S. GDP Growth Reveal Disturbing Trend - See It Market.SeeItMarket.Retrieved22 September 2016, from

China's gross domestic product (GDP) growth. (2016). Chinability.com. Retrieved 22 September 2016, from

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China GDP: Economy slows to 6.7% in first quarter - BBC News. (2016). BBC News. Retrieved 22 September 2016, from

Bijian, Z. (2005). China's" peaceful rise" to great-power status. Foreign Affairs, 18-24.

Morrison, W. M. (2013). China's Economic Rise: History, Trends, Challenges, and Implications for the United States. Current Politics and Economics of Northern and Western Asia, 22(4), 461.

Woetzel, J., Mendonca, L., Devan, J., Negri, S., Hu, Y., Jordan, L., & Yu, F. (2009). Preparing for China’s urban billion. McKinsey Global Institute.

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