Economic Models - Research Paper Example

?Economic Models Before going into the comparison of planning functions of the Japanese and Chinese economic models, let us get a better understanding of what economic models actually are. An economic model is a construct that includes economic processes in the form of variables. The relationships, which exist between the variables, are also included in the model. The economic model of a country represents whole economic structure of the country. The importance of a well-defined economic model of a country can be derived from the fact that no country can perform its basic economic functions without representing core economic processes in the form of an economic model. The economic models perform two basic functions, which include selection of information on the basis of econometric study and simplification of the gathered information. Economic models can be classified as stochastic models, non-stochastic models, qualitative models, quantitative models, equilibrium, and non-equilibrium models. If we talk about some of the benefits of having the economic models, we can say that economic models are widely used for a variety of purposes in the economic environment of every country. Some of main uses of economic models include guiding resource allocation decisions, forecasting the economic activities, planning the functions of economy, and making appropriate decisions related to the economy. All of these uses make economic model one of the most important models for the development of any country. Let us now discuss planning functions of the economic models of China and Japan, which are two of the most progressive and well-established economies of the world. Comparison between Planning Functions of Chinese and Japanese Economic Models Chinese economy has seen significant success and development over the last decade. The communist government of the People Republic of China has been successful in developing a strong Chinese economy, which has started developing its roots in most of the Asian, European, and American markets. “Although the politics of China remains communist, the economics might be called Advanced Mercantilist” (SNS 2010). Chinese economists have analyzed the perfects ways to deal with the west by considering the cases of South Korea and Japan and have come up with a well-designed economic modal, which has the ability to make the Chinese economy one of the most stable economies of the future world. If we talk about the Japanese model of economy, we can say that Japanese economic model has proved to be a very useful tool not only for the analysis of the current economic situation of Japan but also for the projection of its future economic situation. Japanese economy has faced various shocks after the World War II but the responses of the Japanese economic model to the shocks provide us with a very good approximation of the current economy of Japan. The planning functions of the Japanese economic model also depend on the types of consumers. Unlike Chinese economic model, the Japanese economic model considers consumers to be of two types, which include permanent-income-hypothesis consumers and rule-of thumb consumers. The response to shocks becomes very realistic and effective due to identification of types of the consumers. If we analyze the most recent economic recession and the affect of that economic recession on the economies of China and Japan, we come to know that china was one of those countries, which survived the economic recession up to a large extent. It is due to the implementation of an appropriate economic model that Chinese economy did not shake as the result of recent economic recession. Various analyses and reports show that the countries like Germany, Japan, America, and the United Arab Emirates were affected heavily due to the recent economic recession but the economy of china was so stable that the recession could not affect it up to a large extent. Japanese economy, which is currently the world’s second largest economy, also slipped into the economic recession. “It was the first time since 2001 that Japan's economy has contracted for two consecutive quarters, the definition of a recession” (Frackler 2008). But it was due to the implementation of the effective economic model that Japanese banks were relatively unscathed by the financial crisis. The financial crisis affected the banking system of most of the European and American countries, but Japan and china were those countries, which were able to protect theirs banks from getting affected by the economic recession. Talking about Chinese and Japanese economic models, let us discuss those characteristics of the Chinese economic model, which make it very stable and progressive as compared to Japan. Although the economy of Japan is very strong but the characteristics of Chinese economic model leaves behind the strength of Japanese economy model. Some of the major characteristics of Chinese economic model include use of intellectual property, encouraging foreign direct investment, selling intellectual property as exports, preventing the import of unwanted products, subsidizing the key industries, and usage of currency manipulation. Let us discuss these characteristics in comparison with the Japanese economic model in order to get a better understanding of the actual difference between the Chinese and Japanese economic models. Use of Intellectual Property Intellectual property is considered to be one of the most important elements of the global economy. The government of china believes in the importance intellectual property for the economic development of a country. Intellectual property is the peak achievement of most of the western countries including Japan. One of main policies of Chinese economic model, which differentiates it from Japanese economic model, is that china does not allow any non-Chinese firm to enter its market and sell the products to the local traders unless they provide their valuable intellectual properties as the price for reaching Chinese markets. It is a very beneficial method to gain intellectual property because in the today’s world, many non-Chinese firms have a desire to enter Chinese markets, so taking their intellectual properties in return of allowing them to operate in china is a good step. Although china has been successful in getting IPs from different sources, yet it should be able to resist pressure of the Western governments to adopt and implement proper intellectual property laws. Selling IPs to the International World Another aspect of the Chinese economic model is that china sells the intellectual properties to the international world in order to get money out of them. This method of earning a large amount of money was first introduced by Japan but China has gained immense perfection in this trade. Subsidizing Key Industries “China's reformed economy has embraced market capitalism for over 25 years, but its staggering growth may be related to continuing communist control” (Rose). Subsidization was also one of the Japanese economic model’s characteristics in ‘60s and ’70s but China is using this concept now in order to strengthen its economy. In china, the government has a lot of interest in the key export firms of China. “Many outsiders assume they are dealing with real companies, when they are actually dealing indirectly with the Chinese government” (SNS 2010). Therefore, we can say that subsidization of the export firms is one of the important aspects of the Chinese economic model. Foreign Direct Investment Another planning function of the Chinese economic model is that it encourages foreign investors to invest in the projects in China. Foreign investment is always one of the most beneficial aspects for the economy of any country. China has developed a safe and secure investment environment for the international companies and it provides various benefits and investment opportunities to the foreign firms. Facilitating the foreign firms in carrying out their business activities in China has been one of the most significant planning functions of the Chinese government. Chinese government although encourages foreign countries to invest in China but it does not allow those countries to control the ownership. Encouraging foreign investment is also the characteristic of Japanese economic model. Japan is although one of the biggest resources of foreign direct investment for China yet the Japanese government does not allow its companies to give their intellectual properties to China in exchange of trade. “Japanese are smart: they build assembly plants, not design and production plants, and leave their IP at home” (SNS 2010). On the one hand, internal liberalization and massive foreign investment has reformed the economic system of China into socialist-market capitalism, yet the modernized Marxian doctrine is a contributing factor to China’s GDP increase. Analyzing Japanese economic model, we come to know that Japan is a non-socialist country but possesses a centrally planned economic system. Although the bloom over Japanese economy went off in the 1990s, still Japan is one of the key countries, which understand the future of the world’s economic status. The economy of China is 1/8th part of the Japanese economy size but every economist believes that china has the potential to become the world’s next super power in the near future. It is due to the planning functions of the Chinese economic model that Chinese economy has become one of the most stable economies of the current world. China has improved its economy and reduced the level of poverty successfully by participating in the market system and by increasing trade with the West (Rose). Increased trade with the western countries has been one of the key planning functions of the Chinese economic model. China has become an eye candy for the foreign investors because of low labor cost and huge investment opportunities and facilities that it provides to the foreign investors. In contrast, Japan is trying to regain its lost value and significance for the foreign investors. The focus of the currents Japanese economic model is on increasing the export rate. Japan’s economy reached its heights in the ‘70s and ‘80s because at that time a large number of Japanese products were being exported to other countries. However, if we talk about current situation of the Japanese economy, we come to know that Japan has been successful in stabilizing its economic conditions by taking actions against the heavy burden of regulations that hampered progress in many parts of the Japanese economy. “China’s success since it began its transition to a market economy has been based on adaptable strategies and policies” (Stiglitz). Those strategies have been very successful for the development of the Chinese economy. In Chinese economic model, there is a planned approach towards every problem. Chinese economic model differs from the Japanese model in a sense that china focuses more on inviting foreign investment and providing them with facilities whereas Japan focuses more on managed economy that characterizes the mixed economic model. Japan’s economic model is centrally planned and a highly regulated model, which is contemptuous of free markets. China makes use of the concept of social innovation in setting new parameters for the unforeseen economic problems. The economic model of china has brought huge benefits not only for the Chinese economy in the form of 10% annual growth but also for the Chinese people through lifting them out of poverty. The planning functions of the current Japanese economic model also make use of the social innovation concept. “The old model, known as a binding cross-sectional partnership named keiretsu, ran out of time and hindered both; entrepreneurship and innovation” (Spruk). It is due to the effective planning functions of the Japanese economic model that Japanese economy has begun to surge recovery after a prolonged period of deflation and low output rates. The past 10 to 12 years have proved to be very beneficial for the Japanese economy due to the implementation of a more appropriate and dynamic economic model. If we analyze Chinese economy, we identify a shift in the planning functions of the Chinese economic model. A current shift in the Chinese economic model is that china is trying to move away from the export-led growth strategy that it had been using for a long time. “That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods” (Stiglitz). The meaning of export-led growth was that China was able to produce goods without worrying about development in the domestic market. Moving away from export-led growth can only be possible if the Chinese government looks for new sources of dynamism in the growing entrepreneurial ranks. One of the key planning functions of the Chinese economic model is that Chinese government is planning to invest in the development of world-class higher education institutes. The government of Japan has given much consideration to the educational sector of Japan. In the economic model of Japan, educational sector holds significant importance. The planning functions of the Japanese economic model put a great emphasis on the need of high quality education for the Japanese nationals. China has invested heavily in the fields of technology and goods manufacturing but now Chinese government is interested in the development of educational sector. “Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance” (Stiglitz). Summing it up, we can say that Chinese economic model focuses on such technologies, which ensure the advances in knowledge and innovation processes. Japanese economic model is used for both simulation analysis and future projection purposes. The planning functions of the Chinese and Japanese economic models are not only very effective but also they are playing a key role in the economic development of both countries. However, after the comparison of the economic models of both countries, we come to know that Chinese economy has the potential to become world’s largest economy in the near future. References Fackler, Martin. “Japan’s Economy is in Recession.” The New York Times, Oct. 17, 2008, accessed Jan. 23, 2011, http://www.nytimes.com/2008/11/17/business/worldbusiness/17iht-17yen.17879387.html Rose, Spencer. “China’s Economic Model: Marxism and the Market.” Suite101.com, accessed Jan. 23, 2011. http://www.suite101.com/content/chinas-economic-model-capitalism-meets-marxism-a2705744 SNS. 2010. “What is China?.” Tapsns.com, Jan. 23, 2011. http://www.tapsns.com/blog/index.php/2010/01/what-is-china/ Spruk, Rok. “JAPAN'S HYBRID INNOVATION: NEW ECONOMIC MODEL.” Blogspot.com, accessed Jan. 23, 2011. http://rspruk.blogspot.com/2007/11/japans-hybrid-innovation-new-economic.html Stiglitz, Joseph. “China’s New Economic Model.” Project Syndicate, accessed Jan. 23, 2011. http://www.project-syndicate.org/commentary/stiglitz86/English Read More