Question:
Discuss about the Population Statistics and Current Demographic.
The business journalism has always held a saying that “when America sneezes, the whole world will often catch a cold”. The metaphor has been used to extenuate the large size of America’s economy in comparison to other economies in the world and its immense significance and influence on other economies. However, China has risen to overtake the United States as the leading global economy. Since 1990 (when China’s economy was at its weakest), China’s economy has been improving reaching its peak in 2015 when it overtook the United States in the value of trade value which amounted to $3.96 trillion. However, after the faced-paced rate of economic growth, it is evident that China’s economy is on a decline. The growth pace started easing in 2015 by 0.3 per cent from 7.4 percent; in 2016, the growth rate slumped further from 7.1 in the previous year to 6.9 percent. Most countries in the world have been highly dependent on China for both imports and exports. More specifically, China have served as Asian’s main trading partner and as main importer of the latter’s iron core. The slump in economic growth witnessed in China has led to a decline in the prices of non-oil and gas exports coupled with a decline in the value of imports that Indonesia imports from China. What will be the impact of this on Indonesia’s economy? The paper starts by briefly analyzing the major reasons behind the slump in China’s growth rate and then proceeds to laconically extenuate the interrelationship between China’s economy and Indonesia’s economy and the transmission channels in which a shock and shake-up of the former’s economy will reach the latter’s economy. The paper then focuses on the real impact that the slowdown will cause before providing some recommendations as a conclusion.
As a starting point of our analysis, it is paramount to point out some of the causes of the declining rate of growth in China before proceeding to succinctly analyze the impact that the slowdown will have on Indonesia’s economies. Key factors that have influenced China growth rate have been its vast human resources (Inoue et al., 2015), long-running export bloom (Jane and Rod, 2012), and its huge investment as a percentage of its GDP (which is approximately 50%). The huge investment has been fuelled by China’s effort to bridge the gap in its transport and house investments. Zhao (2012) notes that the gap is now closed. Even more worrying is the fact that labor surplus in china is almost fully exploited with the alternative sources of labor being prohibitively expensive for China. Zhao (2012) further argues that, after China’s export rate dropped from 20% to 9% in 2012 as a result of the global economic recession, China is unlikely to recover from this shock. Brynjolfsson and McAfee (2014) further argues that due to the loss of momentum of the key drivers of its economic growth (exports and investment), China’s economy has reached its limit. All these factors have served to cause the declining rate of economic growth in China.
The trade relationship between China and Indonesia have led to the latter intensifying its economic ties with the former (Morris, 2011). Between 2005 and 2014, the export rate of China to the Indonesia have been dramatically increasing from $ 19.7 billion in 2010 to $ 30.5 billion in 2014 (Anderson et al.,, 2015) while the imports from the same countries have been on an increase by an approximate rate of 9.2 % between the same period. A study conducted by Porter (2015) further serves to cement the trade relationship between China and Indonesia. The study emphasized on the massive rise of China significance, impact, and relevance in Indonesia in the past four decade. China’s share of total trade in Indonesia have doubled in a period of ten years (between 2004 and 2014). This has led to China overtaking the United States, Japan, and the European Union as the most influential and largest trade partners of most Asian economies and more specifically Indonesia (Summer, 2015). Having established the relationship between the two economies discussed above, we proceed to discuss the channels through which China’s economic downturn will impact on the Indonesia’s economy.
Trade linkage/relationship undoubtedly serves as the main economic relationship between Indonesia and China (Zhai and Morgan, 2016). This will be the main channels through which any shock, prosperity, or uncertainty will flow between the two economies. However, the impact that each will have on the other depends on the strength of the ties and the extent to which each economy is dependent on the other. It is, however, important to observe that Indonesia’s economy relies more on the People’s Republic of China more than the latter depends on it due to its (China’s) several trading partners (Duval et al., 2014).
The rate of economic growth slump in China will have both direct impact as well as in-direct impact owing to China’s trade relation not only with Indonesia but also with other countries in the world.
Morris (2014) argues that the Slowdown witnessed in China will flow to other Indonesia’s economy by significantly affecting the rate of export and imports between the two regions. In the last three decades, China has remained the single most significant consumer of the final goods (mainly gas, coal, crude palm oil, and non-oil products) produced in the Indonesia.
Consequently, as a result of the slump in its ‘customer’s’ economy, Indonesia’s exports will undoubtedly decrease of decline in the commodities’ prices. Economists further predict a long-run effect where the decline in the exports will cause a decline in Indonesia’s balance of trade coupled with a decrease in the national income through what Van der (2015) explains as the multipliers effect. As earlier explained, one of the major causes for the decline in China’s economy is the exhaustion of the country’s labor surplus.
As such, the country have turned to expensive alternative means of labor; a fact that has served to increase the cost of production. Consequently, the exports from the country have become prohibitively expensive. Indonesia being a main importer of goods from China will inarguably feel the pinch due to its deteriorating balance of trade as a result of increase in the imports’ value. It is, however, important to note that the import value will not increase as a result of increase in quantity but as a result of increase in the product’s prices (Rifkin, 2011). Moreover, given the fact that the exports from Indonesia will be curtailed, the manufacturing sector in the country will be affected massively.
Summer (2015) correctly observes that China’s economy has had a huge positive impact on several countries across the world. These countries (for instance Thailand and Vietnam) also act as trade partners for Indonesia. As such, the inescapable conclusion at this point is that the slowdown in the rate of economic growth in China will affect all its trade partners which will indirectly return to haunt the Indonesia through what Gauvin and Rebillard (2015) describes as second-round demand effect. IMF (2011) observess that China has become the leading importer of copper and steel coupled with other raw materials. As such, decline in China’s economic growth rate will not only affect the prices of these commodities but also the quantities exported. In extension, these countries will reduce their imports from the Asian countries or increase the price of their exports to bridge the gap.
The simulation results of a study conducted by Gauvin and Rebillard (2015) found out that the Indonesian economic growth rate would decline by an average of 0.46 percent for the next five years as a result of economic slowdown in China. Commodities sector in not only Indonesia but all of China’s trade partners will be affected the most (Hana, 2016). More notably, coil, oil, and gas will experience the largest loss owing to the fact that their export is dependent on China’s consumption of these resources. In an attempt to boost its export performance, China might be forced to devalue its currency. If Indonesia’s exports are to remain competitive, the country will also be forced to devalue its currency a fact that will haunt companies in Indonesia that imports raw materials.
Conclusions
Given the huge dependence of Indonesia’s economy on the Chinese economy, it is inarguably true that a slowdown in the rate of growth of China will have even a bigger impact Indonesia. The major impact will be felt on Indonesia’s commodity market (coffee, textile products, crude palm oil, and cocoa) with exports declining due to the low demand in China. As such, the old adage that ‘if plan A fails, the alphabet has 25 more characters’, holds. It is time for the Indonesia to look for an alternative market for its products; mainly crude palm oil, gas, and rubber products. One key alternative would be to turn to the United States and India as alternative strong trade partners. However, it would be vital to analyze the impact that the slowdown in China’s economic growth rate will have on these countries before rushing to them for refuge. It is notable that most of the economies in Asia generally have a huge exposure to the US economy. Indonesia should also institute economic reforms to spur its own generated economic growth as China did to offset the impact caused by China.
In conclusion, the economic slowdown in China will have a negative impact in Indonesian economy through a decline in exports and rise in prices of imports. Likewise, Asia’s economies. As a result, trade partners of the Asian countries will be indirectly affected. Bearing in mind that the current size of the Chinese economy, its slowdown is expected to affect many countries across the globe apart of the sates in the Asian continent. However, this can be mitigated by looking for alternative markets for exports and commissioning of economic reforms such as encouraging the consumption of the country’s products by its citizens. However, this can be mitigated by looking for alternative markets for exports and commissioning of economic reforms such as encouraging the consumption of the country’s products by its citizens.
References
Anderson, D., Krijenko, C., Drummond, P., Espaillat, P., and Muir, D. (2015). Spillovers from China onto sub-sahara Africa. Insight from the flexible system of global models (FSGM). IMF working paper WP15/221. Washington DC: International Monetary fund
Brynjolfsson, E., and McAfee, A., (2014). The second machine age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. W.W. Norton & Company; New York
Duval, R., Cheng, K., Saraf, R., and seneviratne, D. (2014). Trade Integration and Business Cycle
Sychonisation: A Reappraisal with Focus on Asia. IMF Working Paper WP14/52. Washington, DC: International Monetary Fund.
Gauvin, L. and Rebillard, C. (2015). Towards Recoupling? Assessing the Global Impact of a Chinese
Hard Landing through Trade and Commodity Price Channels. Banque de France Working Papers No. 562. Paris: Banque de France.
Hana, S., (2016). “The current economic situation in China and its impact on the Czech republic”, Perspective in Science 2016 (7): 39-44
International Monetary Fund (IMF). (2011). People’s Republic of China: Spillover Report for the 2011 Article IV Consultation and Selected Issues. IMF Country Report No. 11/193. Washington, DC: International Monetary Fund.
Inoue, T., D. Kaya, and Ohshige, H. (2015). The Impact of China’s Slowdown on the Asia Pacific
Region: An Application of the GVAR Model. Policy Research Working Paper Series No. 7442, Washington, DC: World Bank.
Jane, G., and Rod, T., (2012). China’s Gender Imbalance and its Economic Performance. Universityof West Australia
Morris, I., (2014). The Measures of Civilisation: How Social Development Decides the Fate of Nations. Pricenton University Press; New Jersey
Morris, I., (2011). Why the West Rules-For Now: The Patterns of History, and What They reveal About The future. Picardo, New York
Porter, L., (2015). Social Progress Index, Executive Summary. Social Progress Imperative: US
Rifkin, J., (2011). The Third Industrial Revolution: How Lateral Power is Transforming Energy, The Economy, and the World. Palgrave Macmillan; New York
Summers, L. 2015. Grasp the Reality of China’s Rise. Financial Times. 8 November. van der, D., (2005). LINKAGE Technical Reference Document: Version 6.0. Washington, DC: World Bank.
Zhai, F., and Morgan, P., (2016). “The Impact of the People’s Republic of China’s Growth Slowdown on Emerging Asia: A General Equilibrium Analysis”, ABDI Working Paper Series (560): 1 27
Zhao, Z., (2012). Reflection on China’s recent population statistics and current demographic situation in Chinese cross currents, July: 44-57
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