The rapid growth of China as a major powerhouse in the global economy is described by analysts as an example of one of the most significant economic success narratives in contemporary times. The growth has taken place within a span of fewer than three decades is. The Chinese economic reforms started in 1979. The reforms came to a successful end in 2014. During this period, the gross domestic product (GDP) of the country averaged 10% per annum (World Bank, 2016). According to the World Bank estimates, from 1991 to 2010, more than 679 million people in the country were rescued from poverty. Over the same period, China emerged as a powerful economic player in the world. Currently, the country has the world’s largest economy. It is a major manufacturer and exporter of consumer products. It also holds significant foreign exchange reserves.
The aim of this paper is to analyze China’s rapid industrial and economic growth. The rapid rise of this country in the global economy in relation to the financial turmoil experienced in the financial markets will be reviewed. In addition, the response and reactions of the Communist government to economic challenges will be assessed.
The Government’s Response to the Needs of the People in China
According to Carter and Harding (2013), China’s accelerated economic growth has provided the country with opportunities for substantial enhancement of bilateral commercial engagements with other states around the world. Such bilateral partners include the US, which is a major trading partner with China. According to data from government agencies in the US, the volume of trade between the two nations grew from $5 billion at the start of the 1980s to 592 billion in 2014 (Ross & Bekkevold, 2016). Today, China has become the US’s second-largest trading partner. It is also the third-largest export market for manufacturers operating in the US. In addition, it is the largest source of imports for the US. It is noted that many corporations in America have established significant operations in China. The aim of such an expansion is to exploit the vast Chinese market (Lawrence & Martin, 2012). The corporations also aim at exploiting the low cost of labor in the lucrative export market. The activities of the American corporations operating in China have increased the competitive advantage of these organizations in the international market. At the same time, corporations are able to supply the American domestic market with low-cost products (Chow, 2004).
Industrialization is necessary for the economic growth of many countries. The industrialization is also required to reduce poverty in the country. However, this development has a significant impact on the nation’s poor population. For instance, the industrialization pattern determines how this population derives benefits from industrial growth (Chow, 2004). Most of the pro-poor industrial and economic policies are aimed at increasing the economic gains of the various production factors. Such factors include the increase in the returns on unskilled labor. On their part, the policies that promote higher returns on land and capital are most likely to increase inequalities in the country (World Bank, 2016).
As such, it can be argued that the use of capital-intensive as opposed to labor-intensive approaches may escalate income disparities. The same outcomes are experienced in the employment of skill-based technologies. The scenario is especially evident in areas where capital is concentrated, and the levels of education are low. The location of the industrial entities may also have a significant impact on the levels of poverty and inequalities in the state. Most industrial and manufacturing firms are located in urban areas. The location is informed by access to better infrastructure, skilled labor, and large markets. It is also informed by technological innovations, which are available in urban areas. The promotion of non-agricultural activities in the rural areas may be a way of decreasing inequalities and disparities in society (Buckley, Lo, & Boulle, 2008). Such activities include the establishment of small and medium enterprises in rural areas.
After the Second World War, China adopted an isolationist development strategy. The strategy excluded the country from the world economy. The Chinese leadership, however, realized that the country was not progressing, and the needs of the people were not being met. As such, by 1978, the country began reforming the isolationist and centrally planned economic policies (Chow, 2004). Since the initiation of the reforms, China has experienced rapid economic growth. In addition, the country has achieved one of the highest GDPs in the world. By the 1990s, the nation’s GDP stood at 9.9 percent (World Bank, 2016). The growth was high in the manufacturing sector.
The sector had a compounded growth rate of approximately 11.3 percent per annum in the early 2000s. On its part, the services sector grew by 10.4 percent (World Bank, 2016). According to a 2016 report by the World Bank, the contribution of the industrial sector to the GDP also increased. The share rose from 35 percent in the 1960s to 46 percent by 2004 (World Bank, 2016). However, the period saw a remarkable decline in the growth of the agricultural sector. For instance, the sector’s contribution to the economy reduced from 38% to 13%. However, the reduction of employment in the agricultural sector was modest (Chow, 2004). For instance, by 2002, the labor force within the sector stood at 44 percent of the country’s population. What this means is that compared to the other industrialized economies, China’s economic growth is still dependent on the agricultural sector (World Bank, 2016).
The reforms that were adopted by the country in response to the needs of the citizenry followed the model adopted by the other East Asian economies. The economic growth was largely anchored on rapid industrialization. It was also tied to open trade practices and the liberalization of the country’s financial markets. In addition, the economic growth was driven by the import-export liberalization. The adoption of technology, which was adapted to the needs of the domestic resources, was also a major contributing factor. The technology was adapted to address the needs and requirements of the country’s large labor force (Ross & Bekkevold, 2016).
The agricultural reforms saw the de-collectivization of agricultural land. The move led to the privatization of land-use rights. The reforms also saw increased investment in rural infrastructure. At the same time, rural farmers were empowered to undertake a more market-oriented output approach. As a result of the reforms, agricultural growth significantly reduced poverty levels in rural China. The growth averaged 10 percent in the 1980s (Chow, 2004). The success of the agricultural reforms also had an impact on the domestic manufacturing industry. The reason is that the farmers could afford to spend on locally made goods and services (Ross & Bekkevold, 2016).
The industrial reforms followed the changes in the agricultural sector. They started with the establishment of village enterprises. The move was followed by the infusion of direct foreign investment. The initial reforms focused on the setting up of the pricing mechanism and market institutions (Lawrence & Martin, 2012). The reforms also sought to reduce the role played by the state in resource allocation. The focus has now shifted to reforming the banking sector. The government is also focusing on reforming state enterprise activities. The undertakings to this end entail the shutting down of unprofitable state-owned manufacturing organizations (Ross & Bekkevold, 2016).
The high economic growth in the country has led to a significant reduction in the number of people living in poverty. According to the World Bank (2016), the proportion of the population living under the poverty line reduced from 53 percent to 8 percent. The reduction was witnessed between 1990 and 2000—the overall poverty rate reduced from 33 percent to 15 percent. However, the World Bank (2016) observes that the reduction in poverty levels was anything but smooth. The bumpy ride was especially witnessed in the provinces that started the agricultural reforms with high levels of inequalities. In addition, despite the poverty reduction experienced at the national level, there are still income disparities between rural and urban regions (Ross & Bekkevold, 2016). In conclusion, analysts argue that the Chinese government responded to the people’s needs successfully. It achieved this by introducing reforms that have uplifted the welfare of the poor population living in the rural provinces.
China’s Economic Performance in Comparison to Neighboring Countries
China versus India
The economic development policies adopted by India after the Second World War were similar to those witnessed in China. They included “near autarky,” dominance by the state, and industrialization (Chow, 2004). In the two states, development was viewed to be synonymous with industrialization. The industrialization focused on basic goods meant for domestic consumption. Private capital was discouraged. The reason is that the two states abhorred monopolization. Consequently, state control was seen as an essential element in the reform process (Ross & Bekkevold, 2016). The general policy for the development agenda was import substitution. As such, the two states adopted a development strategy in which the policies focused on such areas as the licensing of industries and the reservation of key economic sectors for the state. In addition, the policies focused on the control of foreign investment and significant intervention in labor relations and markets (Lawrence & Martin, 2012).
The strategies proved ineffective in the two countries. The reason is that they promoted rent-seeking behavior among investors. Consequently, policy reforms were required. To this end, provisional systems were initiated to encourage the importation of capital goods and relax industrial regulations. Furthermore, efforts were made to rationalize the tax system. However, India’s reforms were sluggish and less consistent. The reform measures only became broader and systemic in the 1990s. The shift took place after a severe macroeconomic crisis affected the nation (Chow, 2004). The Indian economic reforms and change of attitudes are, like China, considered significant factors to the country’s current success. The reforms included the relaxation of the industrial licensing system. In essence, the move was used to control internal production (Ross & Bekkevold, 2016). The reforms also saw the devaluation of the currency. They also involved the reduction of the restrictions placed on the inflow of foreign investment. They addressed technological transfer and other attributes of the labor market. However, the reforms did not affect the controls in labor relations.
Unlike China, India did not reform the agricultural sector. Consequently, the contribution of this sector to the GDP has dropped significantly. In the mid-1960s, the sector accounted for 45 percent of the economy. The figure reduced to 19% in 2005 (World Bank, 2016). In spite of this, the agricultural sector in India, just like in China, continues to be a significant source of employment for the population. Consequently, one can argue that the economic development in India is comparable to that in China. The similarities are evident in spite of the differences between the two nations’ political systems. China follows a centralized and party-controlled government structure. On its part, India tries to maintain a democratic and institution-based government.
It can further be observed that the policies that enabled the two states to achieve economic development are an incongruent and awkward fit with what the western world would expect. The Chinese reform was anchored on partial liberalization. It was also directed by limited deregulation and two-track pricing. In addition, an unorthodox legal regime, financial restraints, and obscure private land rights were major elements in the reforms (Buckley et al., 2008). On its part, India’s reform was less distinctive. The country remained a largely protectionist regime (Chow, 2004). To this end, one can argue that the two states followed different policies in their economic reforms. The policies have led to a measure of success. What this means is that the reforms that may succeed in a given setting may not necessarily work in another situation. For instance, gradualism worked well in India but failed in Chile and other developing countries.
China versus South Korea
South Korea, another neighbor to China, has experienced rapid development in the last few decades. The country has achieved remarkable growth with a significant reduction in inequalities and poverty levels. Since 1960, the country’s average growth in GDP has remained at 7.5 percent per annum (World Bank, 2016). Most of the growth is experienced in the manufacturing sector. Like in India, the value of the agricultural sector to the GDP has declined over the years. In the 1950s, South Korea pursued a protectionist import policy. The policy was anchored on high import tariffs. To this end, the state shifted its import substitution agenda towards an export-oriented strategy (Chow, 2004). Consequently, the country’s policies were geared towards the promotion of exports and tax exemption. They were also focused on direct export subsidies and low-interest loans. Just like India and China, South Korea is a successful case of industrial reforms.
China versus Indonesia
While other countries in South Asia were introducing economic reforms in the 1960s, Indonesia was viewed as the least industrialized nation within the region. The country was undergoing economic and political upheavals. Just like China, India, and South Korea, Indonesia’s economic policies were oriented towards protectionism (Chow, 2004). However, after the 1966’s change in regime, the country embarked on rigorous reforms. The reforms focused on a shift from a closed and interventionist economy. The country started to move towards a more accommodating market-oriented economy. The liberalization policies targeted the restoration of the banking system. They also focused on investment regimes, fiscal constraints, and agricultural support systems. They were aimed at self-sufficiency in the production of rice. The trade liberalization included incentives for foreign investors. The new trade policies also reduced the protection of local enterprises by the state. They also enhanced the removal of price controls.
As a result of the improved economic environment, both domestic and foreign investment rose rapidly in the 1980s. Exports grew at a remarkable rate. Just like in China, persistent economic growth led to a significant reduction in poverty levels (Chow, 2004). According to the World Bank (2016), only about 11 percent of the country’s population lives in poverty. Indonesia, like China, managed to reform the economy and change the fortunes of the citizens.
China versus Russia
China’s economic reforms were different from those in other socialist states, such as Russia. To start with, unlike Russia, China did not alter the country’s political system. As a result, the government averted political instability (Chow, 2004). In addition, China’s reform process was not based on a blueprint. On the contrary, each step in the reform process was taken after reviewing the experiences and successes of the previous ones. The approach was dictated by the lack of information and knowledge on the type of market economy that was suitable for the nation (Lawrence & Martin, 2012).
The Chinese Communist leadership had to learn through experimentation. The experimentation was used to convince party members of the usefulness and validity of the new measures and institutions (Buckley et al., 2008). The success of the reforms can also be attributed to the pragmatic nature of the party leaders. The leaders are not restricted to the old Communist ideology. They are open to new experiences and ideas that can uplift the lives of the citizenry. Some of the successful policies that arose from the experiments include agricultural reforms. The reforms were dubbed “the household responsibility system.” There was also the contract responsibility system among industrial enterprises. The free export zones are another experiment that saw the increase in foreign trade and investment (Carter & Harding, 2013).
The Tools used by the Chinese Government to Address Economic Challenges
It is a fact that most countries in South Asia are democracies. However, the political system is different in China. The country adopts a socialist political system. Under this system, the economy is explicitly the responsibility of the government. As such, it can be argued that a democratic state may not effectively apply the political and economic tools used by China to attain economic success. The role of the government in the economy is highlighted in the country’s 1982 Constitution. The document clearly indicates that the government is responsible for the state’s economic development (Ross & Bekkevold, 2016). The State Council is mandated to direct the subordinate bodies in designing the economic plans. A significant part of the government apparatus was galvanized and dedicated to managing the economy. For instance, the government created more than 100 ministries and agencies tasked with the responsibility of overseeing economic reforms (Ross & Bekkevold, 2016).
The major economic sectors were managed by one of the organizations identified by the government. The agencies were supported by the People’s Bank of China. They also received support from the economic and planning commissions (Ross & Bekkevold, 2016). Such a level of organization and involvement is rare in democratic states. Consequently, the tools used by China are not available to democracies.
It is noted that the other South Asian countries also achieved some measure of success. However, their success is incomparable to the rapid development witnessed in China (Ross & Bekkevold, 2016). The approach taken by the South Asian states to reform their economies was different from the Chinese model. In China, the state-controlled all the political and economic affairs of the country. Today, the country is a significant player in the global arena.
The Communist Party’s Tools of Governance and Industrialization
The Contract Responsibility System
The introduction of reforms by the Communist Party can be viewed as a gradual approach to economic transformations. The transformations took place through some form of experimentation. The party adopted several measures and institutional changes, which were implemented in a systematic manner. The reforms started when the government gave the state enterprises some autonomy to manage their investment, production, and marketing decisions (Ross & Bekkevold, 2016). The semi-autonomous state made it possible for enterprises to make decisions independently. The move was a departure from the centralized decision-making system practiced by the Communist Party.
The experimentation started in 1978. The first phase involved six-state enterprises. By 1980, there were over 6,000 industrial organizations under the experiment. About 45 percent of the enterprises were given the authority to make autonomous decisions (Lawrence & Martin, 2012). After witnessing the success of the semi-autonomous experiment, the government decided to give the enterprises financial independence. The agencies were allowed to retain their profits after paying taxes. The retained earnings were geared towards the growth of the enterprises. Thirdly, the government decided to introduce the responsibility system. Here, each firm was responsible for specific outputs (Lawrence & Martin, 2012).
The system required some of the organizations to retain a given portion of their profits. The retained earnings were factored in after the firm submitted a fixed amount to the main organization that controlled that economic segment. After the success of these reforms, the government took another step to move its reforms forward. The phase followed the introduction of the contract responsibility system (Lawrence & Martin, 2012). Under the new system, the state enterprise was permitted to retain the surplus profits. However, it had to pay a fixed tax to the parent organization. The retained profit was to be distributed to the workers and used in capital investment.
In 1990, the government decided to give up its control and ownership of the small and medium-sized enterprises. However, the state retained its control over the large organizations. The small and medium organizations were allowed to sell shares to the managers and members of staff (Carter & Harding, 2013). The move was supposed to infuse the enterprises with capital for development. The strategy was a significant motivating factor for the workers who owned a share of the companies.
The Open-Door Policy
In order to enhance the industrialization of the economy, the government introduced the open-door policy. The policy encouraged foreign investment and trade (Buckley et al., 2008). In the past, the country’s economy was closed. The government had put in place protectionist measures. For instance, by 1978, the total value of both imports and exports was only 7 percent of the national income. However, ten years after the introduction of the open-door policy, foreign trade accounted for over 37 percent of the GDP (Ross & Bekkevold, 2016). The provinces were also given the freedom to promote export trade. Consequently, many trading companies were created. The firms were operating in the industrial sector. They were manufacturing goods for the export market. The aim was to enhance the decentralization of the trading functions.
There was the establishment of export-processing zones in such coastal provinces as Guangdong. Foreign investors were encouraged to build factories in these zones. The investors could either set up the factories independently or in partnership with the local Chinese business persons. The foreign investors were not required to pay import levies, which were charged on all items that were processed for export (Ross & Bekkevold, 2016). The philosophy behind the incentives was to engage the expansive labor in China. It was also meant to exploit foreign capital and associated technology.
Chinese Government’s Response to the Challenges Faced Today
Introduction of Economic Reforms
The country has witnessed three decades of successful reforms. The reforms were launched by Xiaoping. The launch took place during the Third Plenum (Chow, 2004). Many observers opine that the country is facing a dilemma today. The observers and economists argue that the country is at a critical juncture. The reason is that the economy is experiencing diminishing returns. To a large extent, the elements encompassed in the broad reform programs are no longer sustainable. They are no longer applicable to continued growth in the future (Lawrence & Martin, 2012). As such, the government is expected to put in place major reforms to avert economic and social stagnation.
It is a fact that China is facing daunting challenges. However, the government is capable of addressing these problems. The policy of flexibility should make it possible to introduce the necessary policy frameworks. The country is facing challenges associated with its economic reforms. The reforms present complex sets of challenges. The issues include shifting macroeconomic growth and development models. As a result, it is important for the country to shift from the previous model that emphasized exports. The new strategy should focus on domestic investment and consumption. Emphasis should also be placed on technological innovation and the creation of a knowledge economy (Carter & Harding, 2013). The government is also expected to introduce reforms in state-owned enterprises. The view of such reforms is to reduce the monopolies currently enjoyed by enterprises operating in the energy, telecommunication, transport, and defense industries (Ross & Bekkevold, 2016). The reforms should include mixed ownership and competition. They should encourage foreign investment in these sectors. Further reforms should target the opening up of the economy. To this end, the government should establish more free-trade zones. It should also lift the restrictions on inbound investment.
Since the third Plenum, the country has experienced significant progress in some of the areas highlighted above. However, the reforms have met resistance in some of the sectors. The resistance is especially from entrenched interests in the economy. In addition, some of the reform strategies have stagnated at the planning stages. According to World Bank (2016), the government has announced more than 130 reforms since the 2013 Plenum. Some of them include the deepening of fiscal plans (Carter & Harding, 2013). In the same year, the government reported that it intended to revitalize the country’s northeastern region. In addition, there were reforms in the budgetary laws.
Reforms in the Innovation Sector
In the innovation front, China does not seem to have embarked on serious reforms. The lack of development in this front is in spite of concerns raised by stakeholders in the sector. The country should make efforts to ensure that it is not trapped in the middle-income sector. To this end, it has to invest in innovation and technology. The development will move the country up the economic value chain (Carter & Harding, 2013).
The country’s economy is largely an assembly segment. There is little realization with regard to creativity and value (Ross & Bekkevold, 2016). It is noted that most of the products manufactured in China are for the export market. There is little innovation in intellectual property. Alongside innovation, the country has to open up the media industry. It should get connected to the world. It is noted that the Chinese community may not take advantage and participate in the innovation world if the government continues to block access to the internet and to the international media. As such, there is a need to liberalize the media sector.
Combating Corruption
The Chinese government is faced with systemic and endemic cases of corruption. The malaise is reported across the entire society. Corruption is costing the country billions in lost productivity. It is also associated with tax evasion and reduction in the legitimacy of the party’s rule (Ross & Bekkevold, 2016). The government has engaged in a spirited campaign against evil. The aim is to purge corrupt officials from the public sector. There are several cases where a high-ranking party, military, and state officials are under investigation. While these efforts are encouraging, it remains to be seen whether the vigor will last. The reason is that such efforts had been undertaken by previous regimes.
Environmental Reforms
China’s policy and practices regarding the environment are described by critics as “very poor” by world standards (Ross & Bekkevold, 2016). The country is facing diminishing and polluted water supplies. It is also battling air pollution, desertification, and inefficient energy usage. The poor environmental management practices affect the health of the citizenry (Ross & Bekkevold, 2016). It is also hurting economic growth in the country.
It is a fact that the government has put in place various anti-pollution policies. Such measures include the Notice on Assessment Performance Related to Air Pollution Targets (Ross & Bekkevold, 2016). In addition, the government amended the Environmental Protection Statutes. The aim was to ensure that public officers at the local level are held responsible in case of environmental pollution. However, in spite of these measures, environmentalists insist that the country is not taking environmental issues seriously. The complacency on the part of the authorities is compromising the health of many Chinese residents.
Conclusion
China has experienced tremendous economic and industrial growth in the last three decades. The growth is associated with the government’s commitment to reforms. The reforms started with the implementation of various agricultural policies that transformed the rural sector. The farmers were allowed to keep part of their produce for the purposes of trade. The industrial sector was also reformed, and certain liberalization measures were introduced. The measures have proved successful. However, after the rapid growth, the country is facing economic and social stagnation. Consequently, the government has to define new policies and strategies to move the country forward.
References
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