The Determinant of Economic Growth in Emerging Market - Dissertation Example

? Table of Contents Introduction 3 Literature Review 4 Research Methodology 8 Dissertation Outline 10 Schedule 11 Outline of the Sources ................................................................................................11 Conclusion…........................................................................................................…………12 Introduction The title of this dissertation is: The determinant of economic growth in emerging markets. The dissertation will identify the determinants of economic growth in emerging economies by focusing on the case of China. Among the emerging economies that notably include Brazil, Russia, India and China (the BRIC), China is the miracle economy. It is the largest of the emerging economies. Actually it is the second largest economy in the world after United States of America. Over the past three decades the GDP growth rate of China has averaged 10%. In 2011, China has emerged as the largest manufacturer in the world overtaking United States of America. It is also the largest exporter and the second largest importer of goods in the world. The economic importance of China and its continued success in posting high economic growth rates makes it an ideal case for studying the determinants of economic growth in emerging economies. China has all the characteristics of an emerging economy. It faces the many challenges that all the emerging economies continuously face and which act as the biggest barriers to their economic growth. 1. Literature Review What is an emerging economy and what are its determinants of growth? An emerging economy may be defined as one that is showing relatively high economic growth and is well set on the path of becoming a developed economy (Blanchard, 2010) Currently there are around 30 emerging economies in the world with China leading the pack of emerging economies. In China, the economic growth has been propelled by low cost manufacturing. Economic growth is the rate of growth of GDP of an economy. The Gross Domestic Product (GDP) of an economy is the total value of the goods and services produced by an economy. Over the past two decades, developing countries have posted high rates of economic growth. This has transformed them into emerging economies. There are many factors that acted as determinants of this high GDP growth rate of the erstwhile slow growing developing countries. One of the biggest determinants of economic growth of developing countries has been the opening up or economic liberalization of these economies. China began economic liberalization in 1979. Before 1979 it was a closed communist economy with inward orientation. India began economic liberalization in 1991. So did many other current emerging economies. The process of economic liberalization in these emerging economies was also precipitated with the fall of communism in USSR. This was followed by the fall of the Berlin Wall in 1990. The Cold War Era now behind and the socialist and protectionist sentiments permanently weakened, the emerging economies were more than ready to accept the newly propagated precepts of economic liberalization and globalization. According to economic theory( Samuelson, Nordhaus,2000), the four wheels of economic growth are: i) Human Resources which include factors like supply of skilled labor, educational standards of the workforce, level of motivation of the human resources etc. ii) Natural Resources (land, minerals, fuels, environment quality). iii) Capital formation (infrastructure like machines, factories, roads). iv) Technology (entrepreneurship, science, management etc.). The economic growth in the emerging economies has been caused due to one or all of the above factors. China grew because of human resources (its cheap labor supply) and the incredible infrastructure (capital formation) that it was able to create for itself These two factors brought a kind of manufacturing revolution in China. While manufacturing led the growth for China, it was services that caused the growth in neighboring India. India had the advantage of human resources with its huge pool of English speaking young population. This helped India to capitalize on the IT revolution that was catapulted by the internet. India became a services outsourcing hub for the major corporations of the developed world( Friedman, 2008). Russia grew mainly on the strength of its natural resources (its huge oil wealth). Brazil grew due to a combination of the factors that constitute the wheel of economic growth. It is to be mentioned here that all the factors of the wheel of economic growth contributed to some extent to the emergence of the developing economies. The capital stock has grown more rapidly in the emerging economies in the past resulting in a capital deepening. This combined with technological innovation has caused the productivity of the factors of production (especially labor) to increase significantly in these economies. The neo-classical growth model of MIT’s Noble Laureate economist Robert Solow(1956) explains a large part of the economic growth of emerging economies. Capital deepening occurred in economies like India, China , Brazil etc. as the stock of capital grew rapidly. This capital deepening was combined with growth in skilled and semi-skilled labor. The net effect produced a growth of output per worker and marginal product of labor. This capital deepening was complemented by technological innovation. Most of this technological innovation took place in the developed economies but were soon transferred to emerging economies through technology transfer. Globalization accelerated this process of technology transfer( Samuelson, Nordhaus, 2000). As a result productivity of emerging economies improved rapidly. China’s labor productivity grew by a whopping 7% to 8% According to noble laureate economist (Krugman ,2006) in the long run productivity is everything. Productivity growth is the single most important gauge of an economy’s health. The improvements in efficiency with which an economy combines labor with capital matter most in improving the long term living standards of the citizens of the economy (Economist, 2009). The total factor productivity ( TFP) is one of the main sources of economic growth. It is the growth in GDP that is not accounted for by the growth in the factors of production like capital and labor( Oliver Blanchard, 2010). For example, if the capital stock and labor both grew by 4% and the GDP growth was 5%, then the Total factor productivity of the economy was 1%. A brief survey of some studies According to a data published by a study of UBS and OECD, the Total factor productivity during the period of 1990-2008 was highest in China followed by India. Figure 1: All figures should have title under the graph followed by the source as shown below Brazil and Russia on the other hand had lower Total Factor Productivities than the developed economies. This gives support to the claim that the economic growth in these countries (especially Russia) is driven more by natural resources. According to another 2009 study of Goldman Sachs, China’s average return on capital is now well above the global average. Only a decade ago it was less than half of the global average. Another study of Andrew Cates (2009) an economist with UBS, used a composite index of technological penetration and productivity. He found that there was a direct link between the rate of technological progress and the productivity of the economy. Therefore, increasing technological progress and penetration in key emerging economies like China is one of the main determinants of their economic growth. In another study by Baizu Chen and Yi Feng (1998) the determinants of economic growth of China have been identified as the emergence of the private and semi-private enterprises, higher education and international trade. The same studied also identified high fertility, high inflation, and the presence of state owned enterprises as factors that reduce the economic growth of China. In another study by Thomas Tovell ( 2009), the key determinants of economic growth of China have been identified as : cheap labor, agricultural and economic reforms, government policy, foreign investment in technology and investments in education, privatization of state-owned enterprises and international demand for Chinese goods, especially United States. In the literature review, need to talk about other people’s research findings on the determinants of growth in China and other Emerging Market Economies. What you have written is not enough as most of the discussion seems to have drawn from the Economist and does not really deal with the question of what has been the determinants of growth in developing countries and emerging market economies in particular. 3. Research Methodology The key objective of the research is to identify the determinants of economic growth in emerging economies by studying the case of China. The key questions that the dissertation will explore are: What were the main factors that contributed to the unprecedented economic growth of China over the past few decades? Do the same factors have contributed to the growth of other emerging economies? The research methodology will rely on secondary research. It will delve into academic sources, online journals, internet sources, and publications like The Economist for gathering extensive information on the factors that have caused the economic growth of China. This information will then be compiled and analyzed to develop a case study on China that will identify the key factors that have contributed to its sterling economic performance. This analysis will then be extended to determine the general determinants of economic growth in emerging markets of the world. Both qualitative and quantitative analysis will be done. The final section of the dissertation will explain the conclusion and recommendations on the topic of the dissertation. 4. Dissertation Outline The dissertation will be divided into five chapters. The first one will be introduction, the second one Literature Review, the third one will be data and research methodology, the fourth one will be analysis of the results and findings and the fifth one will be conclusions & recommendations i) Abstract. ii) Introduction. (Chapter 1) iii) Literature Review. (Chapter 2) iv) Data and methodology. (Chapter 3) v) Results (Chapter 4) vi) Conclusions & Recommendations. (Chapter 5) vii) Bibliography. I will be having regular meetings with my supervisor Helen Solomon who will monitor the progress and provide guidance and support throughout the dissertation process. 5. Conclusion The economic growth of emerging economies, especially that of China, has been an interesting economic phenomenon. The determinants of economic growth of emerging economies seem to be the factors that have been identified in the traditional theory of economic growth (Koutsoyannis , 2010). These are: human resources, capital, natural resources and technological progress. The neo-classical growth theory of Robert Solow is also relevant in explaining the high growth rate of GDP of China and other emerging economies. Technological innovation ensured that the returns on capital continue to be high in spite of the capital deepening. The productivity leaps that the world experienced due to innovations in information technology in the decade of nineties has benefitted greatly the emerging economies. The objective of the research is to identify and understand the determinants of economic growth in emerging economies, especially China. Understanding the determinants of economic growth of these emerging economies will make for a fascinating study. The research will be carried out through intensive research and penetrating analysis. 1. Schedule of future proceedings The schedule for further proceedings on the dissertation can be viewed in the following table: Issue Description Start End Structure (Dissertation Proposal) Structure the dissertation to be able to get started with the research -there should be a date here 09.06.2011 Introduction Literature Review Search for related literature and empirical studies 20.06.2011 15.07.2011 Data and Methodology Search for data necessary and methodology to identify the determinants of economic growth. 20.07.2011 10.08.2011 Discussion of Results Analysing the output and compare the traditional theory of economic growth with the findings 11.08.2011 28.08.2011 Bibliography: The following sources were used in the preparation of the dissertation: Robert M. Solow, 1956, A Contribution to the Theory of Economic Growth, MIT. Paul Samuelson, William Nordhaus, 2000, Economist, Prentice-Hall. Oliver Blanchard, 2010, Macroeconomics, Pearson. A. Koutsoyannis, 2010, Macroeconomics, Macmillan. www.imf.org. www.worldbank.org www.bloomberg.com www.guardian.co.uk. Economist, 2010, Economic focus: the secret sauce (http://www.economist.com/node/14844987?Story_ID=E1_TQRQQJRS) Wayne M. Morrison Foreign Affairs, Defense, and Trade Division China’s Economic Conditions Updated January 12, 2006 http://www.essex.ac.uk/economics/eesj/au10/EC330%20-Thomas%20Tovell.pdf This list of sources is not exhaustive and many other sources will be used as the research progresses and takes shape. Read More