Global Economy Analysis: Negative Interest Rates and China vs. India

This essay delves into the intricacies of the global economy, commencing with an exploration of negative interest rates, their introduction by central banks, and the associated risks. The analysis highlights the unconventional monetary policy's aims, its impact on lending, and the potential pitfalls such as money illusion and challenges to bank profitability. Subsequently, the essay transitions to a comparative study of China and India, the world's two most populous nations, assessing their political economies. It emphasizes the strengths of each, such as China's focus on technology and India's agricultural sector, while also addressing weaknesses like income inequality and environmental degradation. The comparison extends to the impact of rapid growth, structural changes, and the role of agricultural development in both countries. The essay concludes by underscoring the importance of economic liberalization and the need for strategic policies to navigate the challenges and capitalize on opportunities within the global economic landscape.

The Global Economy

The economy of the country is considered as the international exchange of products and services
which is expressed regarding money value. Thus, world economy affects the businesses and
therefore, it is essential for countries to undertake global economy and does not influence
business operations (Mander, 2014). In the present essay, it discusses two different questions
related to economy i.e. assessing the implications of negative interest rates and the risks that
come with such a policy. Further, comparing and contrasting different political economies of the
two largest population countries i.e. India and China and thus focusing on its main strengths and
weaknesses.
1. Some Central Bank have introduced negative interest rates. Explain why such rates have
been introduced and assess the risks that come with such a policy
Negative interest rates are considered as an unconventional monetary policy that aims to set
nominal target interest rates with a negative value. Further, it can be stated that negative interest
rate means that central bank, as well as private banks, decide to charge negative interest which
means that instead of receiving money on deposits, people who are depositing money into the
bank needs to pay regular amount to the bank in order to keep their money with bank (Haufler,
2013). Thus, it increases the morale of banks to lend more money to people and businesses
regarding investing, lend and spend more money rather than pay a fee to keep it safe. For
instance, the central bank of any particular country decides to regulate negative interest rate
policy which would be set to keep the rate at -0.2% that helps bank depositors to pay two-tenths
percent on their deposits instead of receiving any positive interest. However, in the year 2014, it
has been done by European Central Bank which applies the negative interest rate to bank
deposits intend to prevent the Eurozone from falling into deflation. Further, negative interest
rates would help in reducing the costs to borrow for companies and households, driving demand
for loans and improving investment as well as consumer spending (Assessing the Implication of
negative interest rates, 2016). Also, banks might choose to internalize the costs linked with the
negative interest rates through paying them and also negatively impacts the profits rather than
passing the costs to small depositors in the fear that they will turn their deposits into cash.
Both in Europe and Japan central banks decides the slightly negative the interest rates in practice
so that they can inform depositors to pay a sum of money for holding their cash instead of paying
interest to them on their deposits. Main implications of such negative interest rates decline the
long run rates for monetary policy (Rivoli, 2014). Mainly it is done due to a maintaining
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equilibrium position and thus attaining the stable position. In the year 2014, European Central
Bank became the first major central bank to introduce negative interest rate. It introduces the rate
of interest on deposit is now-0.4% while the rate of refinancing operations is 0. Negative interest
rates have been introduced because if banks charge negative interest rates on deposits, then the
high returns on cash could lead businesses and individuals to withdraw their deposits from a
bank. Thus, it would increase risk on the financial stability. Because holding cash is not at all
convenient and thus having the high amount of cash will lead individuals to spend more money
(Berger and Lester, 2015).
There are several risks and issues related to such policy have been identified one of
which is money illusion which means that it has been assessed that the main tendency of people
is to value their assets and goods in nominal terms as compared to real terms. Hence, it would
lead to enhance negative interest rates (Baldwin and Venables, 2013). The main effect of such
issue arises that it helps in redistributing the resources from net savers to net borrowers. Later, it
is stated as the crucial feature of the financial system such as introducing legal restrictions upon
applying negative rates or at least uncertainty regarding the legal standing of such arrangement.
Another issue found was that IT systems were not able to cope with the negative rates. It also
introduces the issues upon banks profitability and capital (Eggertsson, Mehrotra, and Summers,
2016). However capital of bank matters a lot for credit provision or lending money to individuals
and businesses.
Further, in the case of Japan economy, it is dealing with long periods of deflation of fall in
prices. However, a decrease in prices could be better for individuals, and it is bad news for
businesses. It means that businesses have lost their power of pricing and thus decreases the
demand as well. There is various risk imposed with such policy i.e. negative interest rates
discourages saving and interest base investments (Neilson, Pritchard, and Yeung, 2014). It also
assesses that bank aims to minimize further or decrease the interest paid to investors upon their
saving accounts. Further, another risk faced by the economy is about penalizing the nation's
senior members and baby boomers who felt victimized by the market crash of 2007-2009. It also
raises risk in the form of penalizing financial institutions by the central banks and thus they are
trying to shift the costs on customers through imposing high fees. For instance, they charge for
maintaining and checking account monthly, high fees of overdrafts and transfers and fees for
ATM usage, etc. Further, another risk with negative interest rate policy is that it encourages more
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speculative investment which will lead to increase volatility in the market (Mazur, 2013).
However, it assesses that if investors are not able to generate any return on investment, then they
become more desperate for sources from where they can generate more money. Thus, it becomes
more risk taking and correlates to an increase in volatility in equity prices.
Furthermore, there are various risks that relate to negative interest rate policy that assesses that
negative rate feed into expectations regarding low growth and inflation. Also, such lower interest
rates slow down the monetary easing in the future (Williams, 2016). Also, potential legal
complications assess that if negative yielding reserves are used regarding collateral and for
enhancing payments (Carnoy and et. al., 2013). Further, another risk of negative interest rate is
regarding the position of duration and quality so that they can assess the problem. Thus, it can be
stated that negative interest rate influences businesses to lend money to a bank and for that they
have to give money. Bank of Japan determines the fight to global market and threaten to provide
the tip to the country into deflation which is a damaging cycle and thus price falls within the
weakening economy. Thus, it increases risk and causes volatility and instability in the financial
market and also decreases the confidence of domestic companies (Martin, 2016). However, now
the Bank of Japan has become the second major central bank to set negative interest rates
(Sassen, 2013).
Thus, it can be stated that negative interest rate lowers the interest rate and charges a sum of the
amount from investors who have kept money in their accounts. Thus, instead of giving interest to
account holders, banks are charging prices for keeping money and thus asset purchase program is
also being launched which covers a broad range of investment grade securities. However, it
becomes difficult to identify that how long such negative interest rate will persist but seems
possible that they will be low for quite some period (Mander, 2014).
4. Compare and contrast the political economies of the world's two largest states measured by
population, China, and India emphasizing key strengths and weaknesses
It can be stated that China is considered as the emergent political economy and thus referred as
the developing nation whose businesses are governed by a capitalist structure. China's political
and economic development program helps in examining the origins and development of China's
communism and its influence upon modern Chinese political economy. China is developing its
role in global politics, and thus it is considered as one of the main strengths (Haufler, 2013).
Also, the country is focusing on improving its technology and innovation to observe and
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experience an opportunity regarding exploring in depth knowledge regarding political economies
of the country. Moreover, the Chinese economy is now worth $17.6 trillion, and thus it helps the
country to enable and compare that how much money they can purchase within different
countries.
Chinese government focuses on development and thus grow their GDP figures so that they can
attain success. The Chinese government has worked out a new way of growing through debt
funded investment rather than improving the economy so that best results can be attained.
Further, it can be stated that both India and China are the largest population country as well as
growing economy about size and economy (Rivoli, 2014). However, their transformation just not
affect internally but outside the world as well. Thus, such effects already are considered as the
combination of new market opportunities that is arising from improved purchasing power and
high competitiveness (Carter, 2014). Further, it is also crucial to identify the impact upon
countries regarding making effective policies and strategies which help in anticipating the
changes so that best results can be attained in the form of opportunities. Both these countries
experiences a high growth and thus results in attaining targets about minimizing poverty.
Moreover, such effects help in providing market opportunities and thus enhances purchasing
power and high competitiveness so that challenges can be overcome. Further, there are certain
weaknesses which are being faced by both the countries about rapid growth such s rural-urban
income gap and environmental degradation. Hence, such issues are affecting the economy and
political situation of India and China (Berger and Lester, 2015). It assesses that richer are getting
richer while poorer are getting poorer. Hence, the government of India and China needs to focus
on developing such economies and make strategies to overcome such issues so that best results
can be attained. Moreover, rising income creates high structural changes within agricultural and
food services and thus demand and consumption pattern shifts. It also impacts upon the trade and
investment within the country about the affect the growth of the country (Baldwin and Venables,
2013).
China and India both are the most populous countries respectively 20.4% and 17% of the world
population. Although they are still developing nation with per capita incomes of just $ 1740 and
$ 720 (Dahiman, 2007). However, both the countries India and China have experienced high
growth in the agricultural sector and thus it is one of the main strength so that Green Revolution
is being emphasized regarding attaining high industrial growth as well as a decrease in poverty
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condition within the country. Also, in the prospects of future growth, it also impacts upon the
domestic economies and sustains in the country so that economic and agricultural development
can be attained. Thus, rising incomes within such countries will continue to create pressure upon
structural reforms and thus improve rural and agricultural economies so that change in the
demand size and consumer taste can be improved (Eggertsson, Mehrotra, and Summers, 2016).
Both China and India possess effective agriculture sector and thus the experiences shows the
crucial role agricultural development and thus improves the industrialization as China attains
desired success. Further, it is essential for China and India to respect liberalization and thus
improve the economy of the country. The main achievement of China are overall economic
growth which helps in rising GDP in agriculture, and thus it helps in improving the economic
condition of the country. Thus, it is essential for them to attain desired success through
improving the economy of the nation (Neilson, Pritchard, and Yeung, 2014). Also, rising growth
in agricultural production and productivity helps in rapidly improving the economic growth and
thus attain certain policies i.e. education, rural health infrastructure, and technological
improvements so that rapid growth can be attained. Another strength is a reduction in poverty
that helps in declining over 33% to less than 3%. Hence, it helps in improving the economic
condition of people and thus reduce the poverty condition of people and suggests that the future
growth attains success. Further, food security is considered as one of the effective measures
which help in changing the per capital food availability (Mazur, 2013). Hence, China and India
increases the overall security of food in the market. Therefore, it is essential for the government
to improve its political economies so that best results can be attained.
Further, India also faces certain strengths which are overall economic growth and thus helps the
economy to improve its reforms in the form of growth in agriculture and thus to improve the
urban and rural sector. Growth in primary and secondary sector helps in improving the economic
condition of the country and thus attain the best solution. The country also enhances growth
within agricultural production and productivity so that they can adopt certain policy reforms and
thus focuses upon particular production to attain goals (Carnoy and et. al., 2013). Green
revolution carried out within the country aids in attaining high yielding varieties so that they can
benefit the economy. The government of the country is also focusing on reducing poverty and
thus improving the economic condition of individual so that they can improve their living
standard. India also helps in achieving national food security and thus positive developments are
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connected with the country. It helps in increasing the food security conditions and thus attains
rapid growth for production and consumption so that agricultural products or services can be
improved (Sassen, 2013).
Also, both the countries are rising technological powers which help them to improve their status
and consider it as an advantage so that high-quality products or services can be delivered to
consumers. Therefore, it is essential for both the countries to focus on innovation and thus
improve knowledge so that countries can attain success. Hence, it also raises the economic
condition of the country and attains desired results in the future. Currently, it has been identified
that China is developing much faster than India and also improves their overall educational
attainment (Rivoli, 2014). Therefore, it is significant for China and India to expand their
education system and thus leads to enhance the policies and practices which lead to improving
working conditions.
It can be concluded from the study that negative interest rate influences the economy within
Europe and Japan and Central Bank of both the countries require undertaking effective decision
so that they can manage the economic condition of the country. Through charging a sum of the
amount upon deposits invested within bank from customers will affect them because instead of
getting returns they have to pay the amount to the bank. Thus, it leads to discouraging people and
thus such policy found to be a risky situation for the country and it was a debatable issue that it
could be carried out or not within the country for a long time. Another topic profound that both
China and India are at a growing stage and thus it is essential for the government to focus on its
developments which aim to improve its economic condition and attain desired success.
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