Chinas Rapid Economic Growth and Transformation - Essay Example

?China’s Rapid Economic Growth and Transformation Over thirty years ago China embarked on a journey to economic modernisation under the leadership ofDeng Xiaoping who came up with a new policy of reform (Naughton, 2007:23). The key factors towards China’s rapid economic growth and transformation are not unique in comparison to that of other nations, what makes this case exceptional is the pace at which the growth has occurred. The country contributed to approximately 10 percent of the world growth in the 1990s and in the decade up to 2010 in contributed to nearly 25 percent (Wu, 2006:3). In the meantime the country has economically empowered 600 million people and transformed its cities (Wu, 2006:4). From the current trends, China could be the largest economy by the year 2020. China’s rapid economic growth and transformation can be attributed centrally on the revolution from an agrarian economy to and industrialised one. This move can be analysed in various ways. Drastic changes have taken place in the economy and the manufacturing sector contributes to the larger portion of the country’s GDP. The role of the agricultural sector has increasingly decreased over the years. Additionally, the role played by the private sector has increased significantly since the economic reforms in 1978 (Wu, 2006:5). There have been reforms to promote economic activities in the private sector such as the inclusion Protection of private property in the constitution. The sector is a dominant force in the economy and is responsible for the creation numerous job opportunities in the country and a main source of capital funding. Opportunities and Challenges for Retail Businesses in China The retail business in China is taking off at an incredible rate. In next to no time, the sales are expected to reach 1 trillion US dollars annually. In fact, China’s retail market is among the largest in the world. This is due to increasing income levels, a fast growing economy, deregulation of the retail sector and an increasing retail market (Wong and Lai, 2006:58). An exponential increase in the number of hyper markets, super markets, appliances, department stores and electronic stores especially in Eastern China. The main opportunity in the retail market lies in the huge customer base. China has one of the largest populations globally and this guarantees a readily available market for the retailers. Additionally, the financial sector is highly lucrative owing to the immense potential possessed by the Chinese household savings. Foreign investors are attracted by the high production capabilities and the supply of labour. China has a well developed infrastructure that holds massive potential for retailers to develop complex transport services. The most noteworthy development for retailers was China’s accession to the WTO in 2001. Furthermore, the country’s trade barriers and market barriers have been eliminated opening the vast domestic market (Lai, 2006:22). In spite of the booming retail market in the China market, there are several challenges facing the sector. There are various risks and challenges resulting from inflation and fluctuating economic trends in the market. In addition to, there are cultural differences between the natives and retailers from other countries. Other challenges in the market inadequate retail market information, an ambiguous legal environment and a highly unskilled labour force (Wong and Lai, 2006:58). Main Factors That Can Limit Personal Consumption in China and Can Prevent it from Driving Economic Growth in China Personal consumption can be simply described as the total amount of goods that an individual is able to purchase. It is important as it contributes to the aggregate consumption therefore is said to have an impact on overall economic growth. The most important factors affecting individual consumption is the prices of goods. When the prices of commodities are high, consumption will be limited resulting to decreased economic growth. In case where the importation taxes are high, the prices of commodities will definitely be high as the consumers may not afford to pay for the goods (Wu, 2006:7). Inflation forces and market forces are known to affect the consumption of goods and this negatively affects personal consumption which in turn impacts on economic growth. Individual consumption can also be affected by the peoples’ belief and culture. The Chinese culture is somewhat conservative and if certain products fail conform to this then their consumption will reduce considerably (Saich, 2004:58). Peoples’ attitudes and feelings towards a particular good also affect the purchasing power of the good. Personal consumption is also affected by the individual’s tastes and preferences that have been known to limit the quantity demanded. When the demand for commodities is high, firms make more sales which lead to economic growth and development. In a nutshell, personal consumption is influence by socio- cultural and economic factors. Role Played by the State in China’s Economy and Economic Development The state plays a key role in China’s economy in spite of the policy reforms that have been introduced over the years (Lai, 2006:33). Though the economy is capitalistic, it is dominated by the state sector. The state is said to control over fifty percent of the economy and the upper hand in terms of trade outcomes and economic policies. The state gets to choose the best industries with a sustainable future and govern their operations locally and internationally. These are referred to as the ‘strategic industries’ and they include petroleum, telecommunications, aviation, defence and equipment manufacturing. Additionally, the state makes all the policies with regards to the management of the industrial sector. It is clear that the state is the decision and policy making mechanism in the Chinese capitalist economy. This model is not sustainable and has lead to various conflicts in the economy. First, the government controls the economy and this leads to friction with other key players in the economy such as investors and industrialists. As earlier mentioned, the Chinese economy dominates over fifty percent ownership in the economy (Saich, 2004:59). This has led to friction in the economy since the government single handedly makes decisions with regards to trade outcomes and economic policy. Recent studies reveal that the government hand picks the industries that are likely to excel in future and governs them. This has created a lot of controversy among the major investors and other key stakeholders in the manufacturing sector. Studies show that private firms are more productive than state owned enterprises (SOEs). However, the state gives more priority to the SOEs that do not perform as well as the private sector. It can be concluded that the current model is not sustainable since it seeks to benefit SOEs through subsidies and disrupt trade through state intervention (Nolan, 1996:23). The current model should be reviewed to pave way for one that encourages trade liberalisation and supports the private sector. Importance of Export-push and FDI for China’s Economic Growth Export push an FDI are the major contributing factors to China’s success story. The country’s economic growth can be attributed from an increase in FDI and export growth experienced in the last thirty years. As it has been discovered, China has minimal FDI and export push. FDI facilitates the flow of capital into the economy and enhances specialisation in the manufacturing sector (Brandt and Rawski, 2008:69). This leads to further specialisation in the global export market which maximises production to match the increasing demand for exports and the end result is better comparative advantage in international competition. FDI and export push results to the introduction of new technologies and improved efficiency in production. This has had an expansionary impact on the production possibility frontier and increased output leading to improved economic growth. Additionally, export trade has become a major source of income since it contributed to the country’s GDP. The move to join the WTO in 2001 doubtlessly promoted the export market as there were minimal trade barriers. In analysis, FDI and export push have promoted economic growth and development in the country. The introduction of improved FDI policies has also led to the opening up of new areas in the country. Apart from the short- run effects discussed earlier, FDI and export push have been observed to have long-run effects on the economy (Brandt and Rawski, 2008:69). This has been through the gradual introduction of reforms and policies relating to opening up new markets. Unlike other developed countries in the global scene, China has been able to maintain a surplus in the balance of trade showing that the country’s volume is higher than its exports. Importance of Income Inequality to the Chinese Society and its Future Economic Growth Economists view income inequality as the most pressing issue in the Chinese society and its future economic growth and development. The concept is complex and multifaceted. It can be broadly divided into four categories including: regional inequality, marginalisation, rural urban income and class formation. The rural urban inequality has been in existence in China from the late 1940s (Yao, Shujie and Feng, 2005:15). This was worsened by the paradigm shift from agriculture to industrialisation. Although, only a small portion of the population participates in agricultural activities the population that undertakes industrialisation tends to look down upon them. The issue of class formation has become one of the social problems affecting the people of China. The rich tend to discriminate against the poor in society resulting to a division among according to social classes. Furthermore, marginalisation and regional inequality could have a negative impact on the future economic growth and development of the country. This is due to the unequal distribution of resources across various regions or among a certain group of people. Issues of income distribution should be dealt with the urgency that they deserve to avoid future economic problems. Differences between SOEs and SOBs Reforms from Agricultural Reforms Reforms in the agricultural sector began in 1979 and were aimed at improving food productivity in the country (MacFarquhar and Fairbank, 1987:630). On the other hand, reforms concerning SOBs and SOEs began later in the 19th century. Reforms regarding to SOEs and SOBs are more comprehensive and take a global approach (Guest and Sutherland, 2010:620). This is because SOBs and SOEs are affected by forces in the international market. Such forces include increasing inflation rates and economic recessions. Agricultural reforms are more specific since they target the country’s farming activities. Agricultural reform are aimed at increasing food production for the country’s population while SOEs and SOBs reforms focus on increasing the overall financial stability of the country. In general, the reforms vary according to their scope and objectives. Government’s Strategies to Reform the Banking System China’s banking system can be defined as one that has low capitalisation, mediocre asset quality and immense government control (Sutherland, 2001:40). Therefore, the reform framework in the banking sector is based on three pillars. The first pillar focuses towards establishing financial liberalisation, the second pillar involves bank restructuring through cleaning up the banking system and the final pillar involves improved corporate governance. Role of small enterprises in the context of industrial development in relation to ‘grasp the large, release the small’, the enterprise policy of Jiang Zemin Jiang Zemin enterprise was aimed at taking control of the major industries in the economy. These are the ‘strategic industries’ and that include petroleum, telecommunications, aviation, defense and equipment manufacturing. The large companies were managed by the state while the small companies were privatised. This has affected economic reform in the country since it has resulted to the creation of monopoly power in some of the major industries. It has also resulted to friction among the key stakeholders in the economy (Wong and Lai, 2006:57). Factors Driving the Growth of Township and Village Enterprises (TVEs) In China and the Barriers they continued to Face The emergence of TVEs took people by surprise as their performance was outstanding. Even the state was amazed as TVEs could challenge the performance of SOEs. There was numerous benefits accruing from the TVEs such as creation of job opportunities and increased per capita income. Their growth was facilitated by the economic reforms in 1978 that made the economy become one of the best economies worldwide. The political environment also favoured their expansion unlike other business enterprises. Additionally, the organisations were flexible and could adapt to economic changes. Some of the challenges facing the TVES include: an inadequate system of property rights, increased competition leading to limited credit access and hostility towards entrepreneurship. China’s ‘National Team’ of Business Groups The National Team of business groups can be described as a collection of business entities that has been linked through economic and social ties. These groups gained popularity in the 1990s and have been playing a pivotal role in the economy (Guest and Sutherland, 2010:620). Recent studies have shown that membership to the National Team has numerous benefits to the firms. Businesses are able to access capital and other resources that they cannot obtain on their own. Businesses enjoy economies of scale and this enables them to cut down on costs across business functions. From this, it is clear that the groups are important for the country’s economic growth and development. ‘Reform’ in the Context of 1990s SOEs There is an important relationship between SOEs and the private sector in directing the future trend of economic reforms in the country. SOEs are the backbone of the economy in China and govern major sectors including oil, telecommunication and defense. The 1990s were characterised by privatisation of the smaller SOEs (Naughton, 2007:15). Conversely, well established SOEs were merged and subsidised. This policy was aimed at transforming the SOEs to be giants in their respective industries. SOEs are known to be highly lucrative since they can acquire capital and natural resources at cheaper costs. In the current times, there is need to institute reforms that break the monopoly culture in SOEs and promote privatisation of to enhance competition. China’s Science and Technology Policy and How the Market Economy Influenced Research and Innovation The country’s technology has been through four phases since it was declared to be a republic (Naughton, 2007:12). In the first phase, technology promoted the establishment of industries along Soviet lines. The second phase saw an ideological dominance of technology but was faced by economic stagnation. The third phase is the most important since it marked a period of economic and technological revolution. Since 2002, the technology has been characterised by increased industrialisation and technology. The market economy has positively affected research and innovations due to the need of improved production methods to match the current demand and global standards. References Brandt, L. & Rawski, T. (2008) China’s great economic transformation, New York and London, Cambridge University Press, pp. 67- 75. Guest, P. & Sutherland, D. (2010) ‘The impact of business group affiliation on performance: evidence from China’s ‘national champions’, Cambridge Journal of Economics, vol. 34 no. 4, pp. 617-631. Lai, H. (2006) Reform and the non-state economy in China: The political economy of liberalisation strategies, New York and Hampshire: Palgrave Macmillan, pp. 13- 40. MacFarquhar, R. & Fairbank, J.K. (1987) ‘The Cambridge history of China (CHC) The people’s republic, Part I: The emergence of revolutionary China’, Cambridge and New York: Cambridge University Press (CUP), vol. 14, pp. 45- 50. Naughton, B. (2007) The Chinese economy, Cambridge and London: MIT, pp. 15- 30. Nolan, P. (1996) Large firms and industrial reform in former planned economies: The case of China. Cambridge Journal of Economics, vol. 20, no.1, pp. 1-29. Saich, T. (2004) Governance and politics of China, Hampshire: Palgrave Macmillan, pp. 56- 70. Sutherland, D. (2001) “Policies to build national champions: China's 'national team' of enterprise groups’, China and the Global Business Revolution, New York: Palgrave, pp. 32- 44. Wong, J. & Lai, H. (2006) China into the Hu-Wen era: Policy initiatives and challenges, Singapore: World Scientific, pp. 56- 65. Wu, Y. (2006) ‘Economic growth, transition and globalisation in China’, Edward Elgar Publishing, 1- 10. Yao, S., Zhang, Z. & Feng, G (2008) 'Ownership reform, foreign competition and efficiency of Chinese commercial banks: A non-parametric approach,’ The World Economy, vol. 31, no. 10, pp. 1310-21. Yao, S., Zhang, Z. & Feng, G. (2005) ‘Rural-urban and regional inequality in output, income and consumption in China under economic reforms’, Journal of Economic Studies, vol. 32, no. 1, pp. 2-24. Read More