Australia emerged unscathed from the global financial meltdown. The labor government hailed it as an economic victory as it had successfully steered the country from the global financial crisis. In early 2012, the treasurer revealed to the Australian newspaper that the Australian economy would withstand the Euro crisis and recession since trade relations with China would ensure that the economy would continue to grow rapidly (Jing 2013, p. 34). The first article concerns over the effect of the slump down of China’s economy on business in Australia. China’s economic growth has been on a steady decline which has had a negative impact on mining industries in Australia. The Australian treasurer, Wayne Swan, had to abandon a pledge to deliver a surplus in the budget. Slowdown of the Chinese economy is set to continue due to dependence on exports to the United States and to the European Union. During the last half of 2012, commodity prices in Australia fell by 22% (Morgan & Snowdon 2013).
The second article deals with the impact of the Cyprus crisis in particular and the Euro zone crisis in general on international business in Australia and other parts of the globe. The recent developments in the Eurozone crisis have erased the recent gains in the Australian market. The crisis in Cyprus may not have a big direct impact on the Australian economy, but it will have a major affect on other counties in the Eurozone; and eventually spill over to Australia’s trading partners (Milles 2013). Recently, The Bank of Japan decided to deliberately devalue the yen by doubling the supply of money in the country through purchasing long-term government bonds (Rodriguez, Ibáñez, Rodriguez & Rivero 2013, p. 41). Pushing down the value of the currency will make Japanese exports cheap and boost Japanese multinationals and corporations. The currencies of major Japanese trading partners, such as Australia, Brazil, South Korea, and China, will appreciate in value; and their exports will become expensive and lose out to competition from Japan (Rodriguez, Ibáñez, Rodriguez & Rivero 2013, p. 42). Chinese economic experts are putting pressure on the People’s Bank of China to react by deliberately devaluing the yen. The currency wars will end up hurting the Australian economy because the Australian dollar has been on the aggressive rise.
Implications on the Australian Government
A recession or slowdown of the economy will result in the increase of unemployment rates. Decline of the Chinese economy will curtail the mining boom, which will trickle down to other industries, such as retail, construction, and manufacturing that are the largest employers in the country. Between August and November 2012, job opportunities fell with 2.2% and there are four unemployed workers for every available job vacancy (Cognac 2013). In the public sector, vacancies declined with almost 30 percent. The federal Labor government together with state and territory governments began implementing austerity measures, which included job-cutting in order to sustain the stimulus packages that had been injected during the 2008 global economic meltdown (Head 2013).
Social spending will have to be cut down. The government will have to ignore demands by major corporations for low labor costs and lower taxes. The boom in the construction industry is also on the decline and will soon stagnate as financial insecurity and job losses preventing young people from buying new homes (Besim & Mullen 2013, p. 87). In March, the activity in the construction industry experienced a slump for the 31st consecutive month. Hundreds of construction workers have lost their jobs because the first response to the economic decline was to reduce laborers.
The gap between exports and imports in 2012 was $2.64 billion, which experts and analysts cited as the worst deficit since 2008 and the fourth-largest in the history of the country’s economy (MacCalum 2012, p. 174). The situation is expected to turn grim since car imports from countries that have been hit by the Euro Crisis, such as the United States, outweigh metal and mineral exports. The economy will be a determining factor in the 2013 election and may see Prime Minster Julia Gillard and her Labor government kicked out of office due to reduction in workers’ wages and social spending (Head 2013).
Devaluation of currency sparks financial crisis because the markets are not left to determine market rates on their own. Beijing continuously intervenes in foreign exchange markets to control the value of the yuan (Rodriguez, Ibáñez, Rodriguez & Rivero 2013).The head of Ford warned that the increased international competition coupled with the high Australian dollar would ensure that the car manufacturing industry in Australia would collapse (Cognac 2013).
The policy will make banks from various countries to borrow money from Japanese banks where interest rates are low, and invest money in countries where interest rates are high. The process will push up currencies of the other countries with drastic consequences for internal domestic markets and the exports of those particular countries (Rodriguez, Ibáñez, Rodriguez & Rivero 2013, p. 44). Australia has been impacted heavily by Japan’s yen devaluation policy as the Australian dollar has reached record high and impacted key industries negatively. The government will have to implement a policy to neuter the highly rising dollar.
Implications for Australian Domestic Firms
The construction industry will be the worst hit: decline of activity will lead to loss of revenue and loss of jobs. The manufacturing industry will also suffer heavily as the Ai Group Performance of Manufacturing Index (PMI) has remained constant since December (Head 2013). No sector in the manufacturing industry has been able to expand, and executives in the industry are blaming it on a slowdown in the Australian economy and low global demand of products due to the Euro crisis (Cognac 2013). The retail industry has been on a sharp decline with the performance index falling monthly at an average of 3.9-5 points per the Ai Group-Commonwealth Bank Performance of Services. Retail turn-over has kept declining, which is worse than in the manufacturing industry, where there has been stagnation but no major declines (Cognac 2013).
China’s economy experienced a 2% reduction in growth, which will have a major impact on the mining industry in Australia and trickle down to other sectors of the economy. Australian businesses must therefore start restructuring and preparing (Besim & Mullen 2013, p. 89). The purchasing managers’ index in China has been reducing significantly. China is Europe’s largest trading partner and the Euro crisis will affect the country’s economy and possibly cause recession. China’s borrowing costs will be passed on to Australian banks (Jing 2013, p. 34). Due to uncertainty of the high Australian dollar, international and national businesses are avoiding investing in the country. If the Chinese economic recession continues, state and federal governments will not be able to offer grants to suffering industries or spend on infrastructure because mining royalties and taxes will reduce. The consumer bases of Australian firms will decrease as the pending capacity of Australian households will dwindle.
Implications for Multinational corporations
On 8th April 2013, General Motor-Holden, the Australian subsidiary of General Motors, announced that it would eliminate 100 engineering jobs from its plant in Melbourne and 400 more jobs from its assembly plant in Adelaide (Cognac 2013). There have been over 2000 job losses in the country’s car industry over the past one year and several lay-offs in companies that deal with auto-production. General Motors’ plant in Elizabeth is set to be completely closed down. Since the global financial meltdown began in 2008, its workforce has reduced from three thousand and fifty people to one thousand and six hundred people (Cognac 2013). Multinationals operating in the country, such as General Motors-Holden, claim that they are implementing the measures because the Australian dollar has risen over the Japanese yen, making it uncompetitive to produce locally and cheaper to import. Fingers are being targeted at the move by the Bank of Japan to devalue the yen (Rodriguez, Ibáñez, Rodríguez & Rivero 2013, p. 44).
The federal government under the leadership of Prime Minister Julia Gillard has been in praise of the high performing Australian dollar using it to justify reconstruction in the manufacturing industry. The high Australian dollar has resulted in plant closures and job cuts (MacCalum 2012, p. 176). The Royal Dutch Shell Company announced that it would close or sell its oil refinery in Victoria threatening the livelihood of hundreds of contractors and employees. The federal government is still issuing subsidies to multinationals, and the government will have to increase funding for motor vehicles; particularly, the auto-sector will lose its businesses in Australia and look for investment elsewhere (Cognac 2013).
Companies like Toyota, Ford, and General Motors repeatedly engage in reconstruction of their operations at the expense of the workers. The latter collaborate with the federal and state governments and even the worker’s unions through threats of completely closing down production in Australia (Cognac 2013). Workers are now threatening to break ranks with unions since union leaders are using opportunities to benefit themselves at the expense of the workers. Multinationals may have to relocate to the countries where labor is cheap and readily available.
Analysis Based on Relevant International Business Concepts or Theories
A country’s level of economic development is determined by the Gross National income per person that is measured by the total annual income received by the residents of a nation. China and India have low gross national income while the United States, Switzerland, Sweden, and Japan have high gross national income (Hill 2013). The gross national income is not a very clear indicator as it does not consider the differences in the cost of living. Moreover, official figures neither account for black market transactions, nor consider economic growth rates. China and India are therefore categorized as poor countries; yet their economies are developing rapidly and are expected to become the largest economies in the world. Black market transactions in India account for 50% of the Gross Domestic Product (Smith & Oreiro 2012, p. 26).The first article implies that while the Gross National Income per person in Australia may be high, the equality gap between the rich and the poor can be wider; and the economic growth in the country may be lower than estimated.
According to Nobel-Prize winner Amartya Sen, economic development should be viewed in terms of expansion of the real freedoms experienced by people through removal of impediments, such as neglect of public facilities, tyranny, and poverty (Hill 2013). Sen’s ideology was used by the United Nations to develop the Human Development Index based on life expectancy at birth, attainment in education, and if the average incomes can meet the needs that are basic for life in the country. Entrepreneurship and innovation are the engines of long-run economic growth because they help in increasing economic activity by creating new markets and products that did not previously exist (Hill 2012). Innovation results in more productive labor and capital, and further boosts economic growth rates. Innovation and entrepreneurship require a free market economy. There is a strong relationship between economic freedom and economic growth: countries with high economic freedoms have high economic growth rates. Strong property rights must be put on place to foster innovation since without property laws there is a risk that potential profits and innovations will be stolen (Kolb 2010, p. 63). Lack of adequate protection in developing countries hinders economic growth.
Countries have moved away from centrally planned and mixed economies towards the market-based ones. Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries, such as the United States, Switzerland, Hong Kong and Taiwan (Hill 2013). The shift towards a market-based economy involves privatization and deregulation. Markets need to explore new opportunities in countries that are adopting free-market based economies as they have a lot of potential: such as Latin America with 400 million potential customers, India with 1.1 billion people, and China with 1.2 billion people (Kimber, Lipton & O’Neill 2005, p. 320). The advantages of doing business in a particular state are dependent on market size, purchasing power of consumers, and the probable future profits. When companies identify and invest in the potential economic early, they can get first mover benefits and the country's loyalty to their brand, as well. Companies which realized the potential of South Korea in the 1950s, when it was a third world country, have gained massively as today it has the eleventh largest economy in the world (Hill 2013). The second article suggests that Australia should be on the look-out for new trading partners especially in emerging economies whereas over-reliance on China could be costly.
The cost of doing business in a country is determined by its economic level, political and legal system. The political system must be free, fair and transparent, without need to pay bribes. Supporting businesses and infrastructure should also be put in place. The legal system has to ensure protection of property rights. The benefits, costs, and risks associated with doing business in a country must be balanced. The benefit-cost-risk trade-off is most favorable in politically stable developed and developing nations that have free market systems and no sudden upsurge in inflation rates or private sector debt (Hill 2013). The Labor government and subsequent governments should strive to create an economy where benefits for investing in Australia outweigh the costs.