Political Economy in the Asia Pacific Free Essays

string(135) " host country are followed, as well as continuing to meet the legal requirements of the home country \(Griffin Pustay, 2010, p\." The political economy of countries can be considered interdependent, as they influence each other and experience change simultaneously. This interdependency affects the level of economic wellbeing of countries, including the economic conditions and stability of a country. The political economy of a country encompasses the political, legal and economic systems influencing the country’s economy. We will write a custom essay sample on Political Economy in the Asia Pacific or any similar topic only for you Order Now Jevons (1880) described political economy as the wealth of a country and the reasons contributing to differences in wealth between countries (p. 7). The political system of a country heavily influences the way in which a country operates, and often affects other countries that it actively deals with. Differing legal systems, laws and regulations of countries can also impact other countries. Similarly, the economic systems and changes in a country’s economic position can impact other countries, and at times, their economic wellbeing. Whilst the political, legal and economic systems of some countries are interdependent, disruptions to interdependency must also be considered when assessing those countries’ reliance on each other. Several factors can hinder their interdependency, including comparative advantage not being followed, a strong focus on regionalism and inefficient free trade agreements. Political decisions imposed by Governments can affect the political economy and often the wellbeing of countries. Government decisions, including laws and policies, affect society as a whole (Hill, Cronk, Wickramasekera, 2011, p. 236). There are two main forms of political systems: democracy and totalitarianism. Democracy is a system where the citizens govern the country through their elected representatives (Hill et al. , 2011, p. 245). Examples of democratic countries in the Asia Pacific business region include Australia and Thailand (Department of Foreign Affairs and Trade, 2008) (U. S Department of State, n. d. ). Totalitarianism refers to a system where one person or political party has control over all citizens, restricting political freedom (Hill et al. , 2011, p. 245). Totalitarianism is seen in China and North Korea (Jianming, 2010, p. 2) (Lim, 2009, p. 10-114). These differing political systems can affect economic relations between countries. An example of this is the view that democratic countries are more willing to trade and participate in international business with other democracies, than with totalitarianism countries. Democracies share similar values and laws on intellectual property rights. It is also believed that peace is more prevalent in democracies, enabling a higher e ase of trade (Rosendorff, P. 2000). We see this in Australia’s preference for trade with the US rather than with China. In September 2010, the Department of Foreign Affairs and Trade reported that Australia had an ‘economic relationship’ (measured on trade in commodities, services and two-way investment) with the US worth over AUD$860 billion, compared to less than AUD$100 billion with China. The strength of the economic relationship between Australia and the US is believed to relate to each countries’ strong democratic values and from the US and Australia being strong allies, due to similar political practices (Sheridan, 2011). The varying political decisions and policies made by Governments can also impact other countries. With globalisation being so prominent today, the interdependency of a country’s political decisions is apparent. Globalisation dramatically increased after World War II, with many of the worlds’ major trading countries lowering trade barriers, including tariffs and quotas, after years of favoring local industries (Griffin Pustay, 2010, p. 38). According to Friedman (2000) globalisation is defined as ‘the inexorable integration of markets, nation-states, and technologies†¦in a way that enables individuals, corporations and nation-states to reach around the world farther, faster, deeper, and cheaper than ever before’ (p. ). This integration of economies suggests that Government decisions affect the economic wellbeing of other countries. An example of this is the recent temporary ban of live cattle exports by the Gillard Government in Australia, in response to perceived animal cruelty towards Australian cattle in Indonesian abattoirs. David Farley, CEO o f the Australian Agricultural Company, Australia’s largest beef company, reported that the ban cost the company up to AUD$8 million. He also stated that Australia’s reputation in the international trading market was damaged by the temporary ban (O’Brien, 2012). The political decision to temporarily ban live exports to Indonesia caused financial loss for the Australian cattle industry and affected Australia’s political relations with Indonesia, with the Indonesian Government stopping imports of live cattle from Australia in December. Bayu Krisnamurthi, the Deputy Agriculture Minister of Indonesia, commented that Australia had discriminated against Indonesia by imposing new standards of animal welfare, as the same standards were not imposed on other countries importing live cattle. He threatened to file a claim with the World Trade Organization if discrimination occurred (Vasek AAP, 2011). Whilst live exports to Indonesia has resumed, their imports are down by 50 percent and relations between Australia and Indonesia are affected. The incident damaged Australia’s economy and forced beef prices to rise in Indonesian markets (Nirmala, 2012). This illustrates the interdependency of Australia and Indonesia, with disruptions to trade affecting the political economy of both countries. It is evident that the political risk of Australia and Indonesia has increased. Political risk is the likelihood of political groups (Government and non-government groups) causing changes in a country’s ability to successfully participate in business activities, which may affect profits and goals of local and international businesses (Hill et al. , 2011, p. 266). Animals Australia and the Gillard Government both contributed to the live cattle export ban (Animals Australia, 2011), which in turn affected the profits of Australian beef companies. Businesses in the beef industry (or similar) may re-consider business dealings with Australian beef companies as they re-assess the political risk of trading with Australia. This may also result in Australia seeking markets elsewhere to sustain a profitable beef industry. As Governments implement differing political systems and decisions, other countries are affected, often in an unfavorable way. The differing legal systems between countries can impact dealings between countries and international businesses. The legal system of a country reflects the rules and laws imposed to manage society and behavior (Hill et al. , 2011, p. 253). A firm conducting business in a foreign country must ensure the laws of the host country are followed, as well as continuing to meet the legal requirements of the home country (Griffin Pustay, 2010, p. You read "Political Economy in the Asia Pacific" in category "Papers" 78). Four main legal systems are prominent today: common law, civil law, religious law and bureaucratic law (Griffin Pustay, 2010, p. 79). Common law is present in many countries is the Asia Pacific business region, including Australia, India, New Zealand, Hong Kong and Malaysia. Common law is based on judges’ decisions, creating legal precedents which assist in creating new laws and making future judgments (Griffin Pustay, 2010, p. 79). Civil law is a legal system based on laws that have been set in a code system. It is different to common law, as judges do not have flexibility to interpret the law as the laws are already prescribed in the code system. Civil law is currently present is Japan (Hill et al. , 2011, p. 254). Religious law, or theocratic law, is a legal system that is based on the rules of a particular religion. Religious law is not common in the Asia Pacific region (Griffin Pustay, 2010, p. 79). Bureaucratic law is a legal system where decisions are made by the country’s bureaucrats, often without taking the laws of the country into consideration. Communism and other forms of dictatorships are regularly compared to bureaucratic law. China is an example of a country where bureaucratic law is imposed (Griffin Pustay, 2010, p. 81). It is apparent there are strong differences between the legal systems of countries in the Asia Pacific, which can affect businesses operating internationally. For example, in a recently merged Australian and Chinese company, King Wood Mallesons, Stuart Fuller, the company’s chief executive, stated that China’s Ministry of Justice requirement for all lawyers to pledge allegiance to the Chinese Communist Party will not affect the company’s business dealings or clients (Sainsbury, 2012). However, this could affect lawyers who have not previously worked under the Chinese Communist Party, as they are pledging to uphold communist laws, which differ from Australian laws and values. This could also affect the perception of the company by international clients, whose values may differ from that of the Chinese Communist Party. Hence, it is evident that differing legal systems potentially influence operations between international businesses. New laws can also influence business dealings between countries. Indian companies have expressed concerns over the Australian carbon and mining taxes that are set to be implemented in 2012. Naveen Jindal, Indian parliamentarian and head of Jindal Steel and Power, believes the taxes will deter Indian companies from investing in Australian mining (and similar) companies. He stated, â€Å"The carbon tax is as much of a concern to Indian companies as it is to Australian companies† (Doherty Ker, 2012). Thus tax laws in one country can also affect another country’s economy, with a potential loss of investment opportunities and profits for both parties. It can also be seen that while a law designed for one purpose (in this case, the taxes are to help stop climate change) (Clean Energy Future, 2012) it can ultimately affect another area of a country’s economy – in this case, foreign investment. There have been circumstances where legal requirements imposed for one purpose have actually been seen as an ‘excuse’ for deterring trade or investment. In 2009, the Malaysian Palm Oil Council, on behalf of the biggest palm oil producers in the world — Malaysia and Indonesia – filed a case against the European Union (EU) for introducing sustainability criteria for palm oil imports. The Council believed that the criteria was actually a barrier to the trade of biofuel, based on the EU wanting to continue support for home-grown rapeseed oil, currently subsidised by the EU (Junginger, Dam, Zarrilli, Mohamed, Marchal Faaij, 2011, p. 028-2042). It can be recognised that the EU may have been wishing to protect the home industry and jobs, which generally results in increased costs for consumers (Hill et al. , 2011, p. 109). In disguising the true intentions of laws, a country’s trading relationships can be affected. Thus differing legal systems, laws and re quirements can affect, and often hinder the progress, of international business dealings. The economic position of one country can impact other countries and international businesses. Economic systems can be described as the system by which a country organises how and what should be produced, whom to produce for and how funds should be distributed (Hill et al. , 2011, p. 203). There are three main economic systems: market economies, command economies and mixed economies. A market economy is when production activities are privately owned, and the quantity to be produced is based on supply and demand and is determined by an individual or business for profit making purposes (Hill et al. , 2011, p. 304). In a command economy, the Government determines what goods and services are sold, the prices that items are sold for and the quantities to be produced (Hill et al. , 2011, p. 304). A mixed economy is a combination of both market and command economies, with both private and state ownership controlling the production of goods and services (Hill et al. , 2011, p. 305). It is believed that a country’s economic system directly relates to its’ economic development and wellbeing and some argue that market economies provide greater opportunities for economic development and growth, hence creating a stronger economy (Hill et al. 2011, p. 306-307). This can be seen when comparing Malaysia and Singapore as the country’s systems greatly differ. When the ASEAN and China agreement was put into effect in January 2010, the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) called for a limit of 10 percent in annual growth of the amount of imports from Chin a. This was due to protection of Malay’s as manufacturers found it difficult to compete against cheap Chinese products (Ng, F. , 2010). This shows Malaysia’s economic system reflects command economy characteristics, as there is control over what is imported, which in turn could limit profits due to restrictions. Singapore is evidently more of a market economy. Singapore is considered a very ‘open’ country in relation to trade, therefore depending on international trade (Global Trade, 2012). The World Bank has stated that Singapore is the easiest country to conduct business with, with the openness of trade and aim to attract foreign direct investment (FDI) being contributing factors (The World Bank, 2009). Since signing a free trade agreement with the US, Singapore has imposed competition laws that restrict anti-competitive regulations. The Ministry of Trade and Industry in Singapore stated that by encouraging competition, they would be able to encourage the ‘efficient functioning of the markets’. This move resulted in foreign lawyers and barristers to pursue work opportunities in Singapore (Sawyer, D. , 2006). By comparing Singapore and Malaysia, it can be viewed that market economies (such as Singapore) have greater potential for economic growth. Currency fluctuations can affect countries with interdependent economies when a change in the value of one currency affects other currencies. Indonesia’s economy was considered to be competitively growing from 1966 – 2007, based on the country’s commitment to lowering poverty through rural development and increased production in the rice industry. However, the Asian Financial Crisis from 1997-2000 caused poverty in Indonesia to rise, while GDP drastically decreased (Fatah, Othman Abdullah, 2012, p. 291-299). The high economic growth of Asian countries directly contributed to the crisis, mainly through an increase in investment, excess capacity, high levels of debt and increased imports. As borrowing and investments grew, companies were unable to service their debts (Hill et al. , 2011, p. 176). When the Thai Baht fell by 55 percent in 1998, other Asian currencies were deeply affected, including the Indonesian rupiah, which decreased 76 percent in 6 months. The decline of the Indonesian economy forced the Government to accept a loan of US$37 billion from the International Monetary Fund (IMF) Hill et al. , 2011, p. 177). The consequences of rapidly expanding Asian economies and the impact of decreasing currencies on each country was evident during the Asian Financial Crisis. The economic interdependency between countries had a negative impact on other economies, affecting their economic wellbeing as their economic position declined. Although the political economy of countries is generally interdependent, there are factors that deter interdependency from completely occurring. For interdependency to function best, comparative advantage should be allowed to operate. David Ricardo developed the theory of comparative advantage in the 19th century and suggested that a country should produce and export goods and services that it is relatively more productive at producing than other countries, and import goods and services that are more productively made by other countries (Ricardo, 1817). Through their comparative advantage, countries benefit economically from participating in trade. This also suggests that free and open trade between countries is positive for economic progression (Hill et al. , 2011, p. 65). However, this theory is not always practised since Government political decisions can prevent its effectiveness. On 22 March, 2012 automaker Holden received a AUD$275 million government subsidy to continue to operate its Australian factories, in order to maintain jobs (Straits Times, 2012). According to Chris Berg, â€Å"Less than half of one per cent of the labour force works for the car industry and car manufacturers are not particularly central to the economic structure, cars are not†¦hard to buy from overseas and their manufacturing is not particularly high-tech† (Berg, 2012). Thus Australia is not following comparative advantage in the car manufacturing industry, with the reliance of Government subsidies helping to continue production and maintain jobs. This can be compared to Thailand, with car manufacturing production hugely increasing due to low labour costs (Bangkok Post, 2011). As export demand has increased, production has increased, with an 11 percent rise in the last year (Bangkok Post, 2012). Surapong Paisittanapong, spokesperson of the Automotive Industry Club under the Federation of Thai Industries (FTI), commented, â€Å"We’re confident that total auto production this year will reach 2. million units† (Viboonchart, 2012). Perhaps Australia ought to increase its imports from Thai car manufacturers rather than providing subsidies to Australian companies, assuming Thai cars are cheaper than the overall cost of producing an Australian car. Although countries can be seen as interdependent, barriers are often imposed to protect local i ndustries and jobs, discouraging the comparative advantage theory and potentially affecting economic progression and wellbeing. Another factor that contributes to countries not reaching full interdependency is the focus on regionalism. Regionalism is a method of opening trade amongst neighboring countries and is viewed positively as not only extending markets to neighboring countries, but as strengthening regional security and delaying globalisation. By forming close regional communities, countries can form trade agreements and other mechanisms that protect the region from the threats of globalisation, and still prosper economically through increased local business between countries in the region (Moshirian, 2009, p. 2-8). However, this push for regionalism may be obscuring some Asian countries’ economy’s ability to achieve higher profits, as the countries are still heavily reliant on other countries in different regions. We see this in the ASEAN official data release 2010, which shows that Singapore still exports 27. 97 percent of its’ total exports to countries in the EU (ASEAN Community in Figures (ACIF), 2010). This reliance demonstrates that partner countries are often unable to consume each other’s goods and therefore must export goods to other markets, outside of their own region. Whilst regionalism is still a form of interdependency between countries, the focus is on increasing business between neighbouring countries rather than all countries. Another exception to the interdependency of countries is when free trade agreements (FTA) are not efficient. The increase in free trade agreements since the end of the cold war across the world, predominantly in the Asia-Pacific, suggests countries depend on each other’s business for economic growth (Suominen, 2009). The Asia-Pacific Economic Cooperation (APEC) began as a forum in 1989, before becoming a regional trade agreement (RTA) in 1993. APEC’s main goal is to establish free and open trade and investment in the Asia-Pacific (APEC, 2012). However, trade agreements in the Asia-Pacific region have favored the manufacturing sector, with low tariffs and more freedom to trade, as compared to the agriculture sector, which has seen a high degree of protectionism from Governments in order to protect industry and jobs. This suggests that APEC’s goal is not entirely being reached (Suominen, 2009). Whilst FTA’s are effective in theory, Government intervention suggests that complete free trade is not apparent, thus obstructing the interdependency of countries to a certain extent. It is evident the interdependency of countries can be attributed to the political economy, that is, the political, legal and economic systems and position, of a country. Decisions made by Governments often affect other countries, and at times have adverse implications. A country’s legal system can both restrict and open up opportunities for other countries. Growing regionalism in areas such as Asia means there are closer economic ties between countries in the immediate region. The fluctuating strength of one economy can affect its regional partners, particularly in relation to currencies and interest rates. Whilst there are clearly benefits to be gained from a strong interdependency and reliance on other countries, there are also factors that hinder complete interdependency. When countries do not follow comparative advantage, or engage in inefficient free trade agreements, some of the potential benefits of interdependency can be lost. Often governments interfere in markets for their own political, legal and economic reasons, and the perceived opportunities that should flow from regionalism and other frameworks such as FTA’s are not realised. How to cite Political Economy in the Asia Pacific, Papers