Question

Choose one (1) of the two (2) countries that you have researched, and give your opinion on the degree to which the chosen country manages its economy and monetary policy well. Provide support for your opinion. Compare and contrast the economies and monetary policies of the two (2) countries that you have researched. Make at least two (2) recommendations as to the primary manner in which both countries could improve their economy and / or monetary policies. Analyze the impact that economic and monetary policies of one (1) of the chosen countries currently exerts upon its trade with other countries. Make at least two (2) recommendations as to changes that the chosen country should make to its policies to benefit its foreign trade. Propose one (1) alternative economic and monetary policy that would make one (1) of the chosen countries stronger over the longer term. Support your proposal with anticipated outcomes related to the selected alternative policy. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia and other Websites do not quality as academic resources.

Answer 1

Chosen country is China. Targeting money and credit supply can only result in effective monetary policy. For targeting a monetary aggregate, there must be stability of money demand function (Liao & Tapsoba, 2014, p. 3). Interest rate and income have significant impact on the money demand function. Currently, China is engaged in interest rate liberalization which is expected to increase the effectiveness of the indirect money supply to the economy (Liao & Tapsoba, 2014, p. 19). The current economy of the country is moving more towards market orientation, and they are losing the market interference (Ligang, 2013). China is focusing in achieving the balance economic growth, inflation through industrial up-gradation and rebalancing through effective financial policies.

China's economic policy is aggressive and pulling more capital investment for infrastructure development, more measures to control population in a stringent manner and more investment in technology across various sectors will boost the slowing economic growth (Silverstein, 2013). Overall monetary policy and economic policy of the country is effective. Both these policies aim at reducing the inflation, unemployment and in boosting the economy. Likonomics has mainly three pillars namely, Structural reform, retreating the stimulus policy and financial sector deleveraging for boosting the entire economy of the country (Drysdale, 2013).

Various tests have been performed in evaluating the effectiveness of monetary policy of China; FAVAR was conducted by John Fernal, Mark M. Spiegel and Eric. T. Swanson of Federal Reserve Bank of San Francisco indicates that the transmission of China monetary policy is more effective (Fernald, Spiegel, & Swanson, 2014, p. 21). There monetary policy and economic policy are effective that attracts more foreign country investment, but at the same time economy did not collapse due to 2008 recession and still continues to grow and remains a good destination for investment.

In this segment, we will compare and contrast between Japan and China. Japan makes use of Abenomics, which focus mainly into monetary policy expansion and fiscal policy expansion and structural reform. In this, both monetary policy and fiscal policy are based on Keynesian model and structural reform focuses only on supply side and in deregulating the economy (Drysdale & Fujiwara, 2013, p. 9). Yen is always kept at lower rate in order to boost the economic output, and Japan raises fund by issuing a huge amount of bonds. Consumption is the main driver for the economic growth. On the other hand, China is closed economy and not liberalized like Japan. China is encouraging more foreign investment and not concentrating on people, unlike Japan. China's main strength is their population and power of consumption through which more foreign investments are pulled in, unlike Japan. Japan monetary policy boost consumption unlike China where people are suffering. Japan economic policy takes concern of the population but in case of China, only the growth is emphasized and does not have appropriate reforms.

Japan has to consider reducing consumer taxation for accelerating economic growth (Bloomberg News, 2014). Japan can increase the interest rate which will attract more foreign investors to invest in the country. Incase of China, first liberalization in the economic policy is required and next important step to be taken by the country must be privatizing the financial sector for improving the money supply and in reducing the imbalance.

China's economic policy and monetary policies are favorable to an extent that compliments international trade. Strong domestic demand in China is attracting more foreign investors (WTO, 2014, p. 9). The People's Bank of China continues to maintain managed floating rates that reduce the fluctuation in the exchange rate over the period. China has FTA with more than 20 countries around the world. China has become the largest trader in the world, and it has trade surplus (WTO, 2014, p. 28), and this country attracts more FDI and FII. Besides favorable trading climate and condition, China lacks in participating in international trade politics. China gives more preference to their interest when compared to considering other factors (Swp-berlin.org, 2014).

China is following closed economic system which has to change in order to get more benefit. Open economic system must be implemented by China in order to grow their trade and commerce. Incase of multilateral WTO agreement there is some incomplete implementation of accession obligation (SWP Research Paper, 2014, p. 11). This has to be completed in order to continue the same growth in trade and commerce.

Liberalization is the need of an hour that has to be implemented by the country in order to enhance its trade growth. With the growth in competition and opportunities, China has to become more transparent about all their policies, rules, the transformation step, and non-discrimination policy and so on (SWP Research Paper, 2014, p. 12). To enhance the trade and commerce, China has to fix their ongoing problem with WTO in order to be successful in the future. China must focus their policy on recognition of market economy status (SWP Research Paper, 2014, p. 18).

China obtained significant benefit from bilateral trading, but this cannot be implemented at all level. There must be flexibility in the policy to adapt to changes. Adopting multilateral policy will be beneficial in the long run because it will enable the country to develop and trade through all sides, and this will open the economy that is essential.

China must develop policies that will enable in boosting the household income instead of wasting the resources (Klein, 2013). The economic policy must be such that, it must focus on increasing the employment and the income of household. There is more investment and resources available for the country, but there is no growth at the root level (Klein, 2013). An economy can be successful and flourish only if all people in the country can meet their needs. Investment made by the country must focus in improving the consumption level of people.

If China needs to grow stronger, they have to reduce their financing to the state or local government for making hasty investment by accelerating the public savings. Economic policy must be such that, small player must be encouraged by large companies in meeting their requirements; this will increase the income generating capacity.

Similarly, more employment and opportunity must be given to local people in executing the government projects. More contracts and employment must be given only to Chinese people. There must be a minimum ceiling amount to be decided in order to avoid underpayment to the labor.

Government must make the loan processing easy to the small business if they are genuine to encourage them. With the growth in population, it will be wise for the government to privatize the financial system of the country and must deregulate the interest rate (Klein, 2013). Private commercial banks will provide loans at attractive rates to the small and medium business.

Most of the state-owned companies generate higher profits, and normal people are suffering for money. Rule must be such that these state owned companies must take care of the requirements of respective local people need out of the profit generated by them. By controlling population, soon China will become older with fewer children and young population, which will automatically pull down the growth. Government must lift the leverage and reforms that are beneficial for a couple with one child to boost the entire economy.

These suggestions will contribute for the growth in the country as it will reduce the income inequality in long-run and improves consumer spending that is essential for any economy to become strong.

Suggestions

Among top five central banks, China was the only bank to maintain positive real policy rate, due to the tight monetary policy which resulted in deflationary head wings which resulted in current account shrinkage. It results in domestic imbalances and will offset some of the international spillovers by not over-burdening through massive global monetary stimulus (Ma, 2014). This in turn will reduce the volatility.    

Reference

Bloomberg News. (2014, April 8). Bank of Japan’s 8 April Monetary Policy Statement: Full Text - Bloomberg.

Drysdale, P., & Fujiwara, I. (2013). How Should the World View Japan's New Economic Policy Strategy?

Drysdale, P. (2013, July 8). Likonomics and China’s new economic strategy.

Fernald, J., Spiegel, M. M., & Swanson, E. T. (2014). Monetary Policy Effectiveness in China: Evidence from a FAVAR Model. Retrieved from FEDERAL RESERVE BANK OF SAN FRANCISCO

Klein, M. C. (2013, November 15). Will China’s New Economic Reforms Be Enough? - Bloomberg View.