The Study On External Shocks

With the development of economic integration and globalization since the 21st century, the economic interdependence between countries in the world has reinforced, and the possibilities of suffering external shocks have become more and more. Therefore, it is necessary for us to deeply study the problem of external shocks no matter whether it is in theory or in practice. It is well known that the theories of international economics have also faced huge challenges with the increased opening of global economy. The traditional international economic theories and policies have been challenged by the external shocks, which need to be innovatively studied by keeping the track of the times. It is certain that the impacts of external shocks on both internal and external economy have been larger and larger with China's quick integration with the world economy, especially, the 3F crisis in 2008 imposed unexpected shocks on China's economy which is characterized by quick development. In view of this, we have made a more comprehensive, systematic and deep study on the external shocks from practices to theories and then from theories to practices by standing on the shoes of small and medium-sized countries from the perspective of globalization and open economy. Our focus is ranging from the intension and characteristics of external shocks to its sources, from its impacts and adverse effects to its rationale, from the new issues that external shocks put forward on governmental macroeconomic policies to the new study areas that it added to the theories of international economics.In the first place, the thesis sums up the main views of the study on the problem of external shocks. External shocks can be defined as certain events or forces, which are external, unexpected, unpredictable and beyond one's control, suffered by an open economy in the context of the current economic integration and globalization. Such events or forces may have impacts on the economic variables ( eg. GDP, CPI, employment and balance of payments etc.) , such as financial crisis, trade conflicts, energy crisis, food crisis as well as the changes in interest rate and exchange rate. On the basis of its intension, we set forth the main characteristics of external shocks and the reasons for its occurrence. Making a general survey of history, the main characteristics of contemporary external shocks are as follows: first, financial crisis occurs frequently; second, external shocks mainly emerges from the developed countries; third, multi-external shocks occur concurrently; fourth, the impacts of external shocks has shifted from dummy economy to physical economy; fifth, external shocks has two-fold effects. Since 1950s, the most frequent"Black Swan Events"have been not more than financial crises, such as the European currency crisis, Mexican financial crisis, Asian financial crisis, Russian financial crisis, Brazilian financial crisis and Argentinean financial crisis, which have occurred successively in the transition from the 20th century to 21st century. The one which has the greatest impacts is the global financial storm resulted from the American subprime crisis. In 2008, it was rarely the case that multi-crises occurred successively in one year in the world, including the oil crisis, food crisis and financial crisis.Based on the said discussions, we analyze the impacts and adverse effects of external shocks on the world economy more deeply. On the one hand, external shocks have greatly influenced the structure of the world economy. For instance, the previous Soviet Union has disintegrated, the Japanese economy has lost ten years, the Latin American countries have been deeply trapped into debt crises and financial crises, America has been unprecedentedly hurt by financial crisis in 2008 and faced severe challenge in its economic supremacy. On the other hand, external shocks have badly destroyed both dummy economy and physical economy. These shocks have not only resulted in the decrease in economic growth, increased unemployment, high inflation and instantaneous evaporation of wealth, but also shifted from dummy economic areas to physical economic areas via wealth effect which bring huge shocks to the world economic system. Then, how do external shocks occur?Next, we study on the rationale of external shocks more deeply by starting from the"two-country matrix"proposed by Meade, and reveal the internal law and theoretical sources for the occurrence and development of external shocks. External shocks mainly arise from the"spillover effects"of one government's macroeconomic policies. That is to say, in an open economy, no matter which economy implements a certain policy instrument in its macroeconomic policies, it will certainly have impacts on the internal and external balance of all the other economies even though the economy can realize its internal economic objectives. The theoretical sources of external shocks can be better exemplified by mercantilism, classical economics, new classical economics, Marxism and Keynesianism school of thought. Meanwhile, the theoretical development of external shocks exhibits the opposition in theoretical views and economics values between Keynesianism and new classical macroeconomics school of thought. The theory of real economic cycle which represents new classical macroeconomic school of thought believes that external shocks origins from technology innovations. It is exogenous orientation, thus it advocates market liberalization but opposes governmental intervention, while Keynes believes that demand shocks have impacts on economic cycle. His suggestion is endogenous orientation, thus he emphasizes governmental intervention.But what's on earth the reasons for the contemporary external shocks? It's an issue that we should not avoid. We believe that, with the rise in the trend of thought of neo-liberalism after the collapse of the Brettonwoods System, the developed capitalism countries, such as America, have advocated free market economy, raised a wave of global financial disintegration, thus financial globalization quickly occurs, financial innovations emerge one after another, and high leveraged derivative financial instruments seriously separate from the physical economy, which generates speculative bubbles. In addition, the neo-liberalism represented by the"Washington Common Understanding"has been spreading everywhere, the former Soviet Union, eastern European countries and Latin American regions have been heavily destroyed with country disintegration, social unrests and frequent financial crises. It's clear that the neo-liberalism is the thinking origin of the external shocks.The characteristics and sources of external shocks make clear that there have been great changes in the backgrounds and conditions of the study on the economic theories and policies in the context of globalization with entering into the 21st century. Therefore, external shocks put forward new challenges on international economic theories and policies.First, the traditional international economic theories are based on both physical economy ( i.e. international trade ) and dummy economy ( i.e. international finance ), and study on how to achieve both internal and external economic objectives through macroeconomic policies in an open economy within the ideal framework of internal and external balance. However, due to the economic globalization,"spillover effects"have been reinforced on the one hand, and on the other hand, the external disturbing factors, i.e."swan events", have shocked the theoretical system of traditional international economics. Put another way, international economics should add up external shocks into its framework. That is, on the basis of the theories of traditional international economics, we should study the issues of international macroeconomic policies under the"policy spillover effects", but also the issues that how to defend external shocks so as to achieve the internal and external economic objectives by international macroeconomic coordination and cooperation. Therefore, the theoretical study on international economics is expected to be innovated by incorporating the external shocks into the study framework to extend the study field.Second, this is just because of the said reasons, the thesis further studies the new issues that external shocks raised on governmental macroeconomic policies. It states that the governmental macroeconomic policy management should achieve both internal and external economic objectives and defend external shocks, which makes it more difficult for one country to regulate its macroeconomic policies. Thus, the important new topic of international economics is to strengthen international macroeconomic cooperation and coordination. From the dilemma of macroeconomic policies in"Meade Conflict"to the assignment rule of Mundell, from"Swan Model"to"Tinbergen Rule", from Krugman's"Trilemma"to the new open economy macroeconomics, all these indicate that external shocks occur frequently in the context of globalization with space-interdependence in international economy. It also indicates that the policy effects have been greatly reduced because we use traditional international economic theories and policies to solve the problems arising from"Black Swan Events". So it is urgent to innovate our study on international economic theories under the circumstances of the said embarrassment.In summary, we make a comprehensive, systematical and profound study on many aspects of external shocks with one thread, ranging from its intension, characteristics and sources, impacts and adverse effects, rationale, to the new issues encountered by the study on external shocks, the innovations in international economic theories as well as governmental macroeconomic management.However,we should better know that any economies which are in the current open economy can not evade globalization but welcome the challenges and boldly face external shocks so that they can rise to prominence from the shocks. Because the external shocks have both negative and positive effects. The positive effects of external shocks means that these shocks can reveal the deficiencies and shortages of the economic system, which can create a"reciprocal effect"that will not only improve our consciousness for crisis but also provide us with new opportunities for compensating shortages and correcting deficiencies. In response to the negative effects of external shocks, we should carry out various kinds of macroeconomic policy cooperation and coordination to cushion or offset them. What's more, we should make the best use of the situation on our own initiatives rather then passively, convert disadvantages into advantages, which is essential for China that is just emerging on the horizon from its reform and opening up to the outside world.China has joined in the world economic trend. It is difficult for it to maintain its own integrity. The times of external shocks has been coming, China should prepare for responding to these shocks at all times. With the increased deepening of China's reform and opening up to the outside world, the 1997 South Asian financial crisis has marked the commerce of external shocks suffered by China. After China's entry into WTO, its external economy has developed with an unprecedented fast speed, both its current account and capital and financial account have moved into surplus, its foreign reserves have ranked the first in the world and its foreign trade has increased strongly. However, China is encountering many problems, such as trade conflicts, RMB exchange rate, the sharp increase and decrease in international oil price and the rise in international food price, especially the international monopoly in the price of ore products. We should not ignore the impacts of these external shocks on our country.The practices prove that China's macroeconomic policies in response to the external shocks are effective and the relevant conditions are sufficient. As long as we stick to the values of Marxism and Keynesianism economics, prudentially treat the opening of finance, insist on the national values standard and improve RMB exchange rate, we can defend the external shocks more effectively, make the best use of all the forces, transform the"dangers"into the"opportunities", find out the development chances in the shocks and step into a road to appear on the horizon as an economic powerhouse.