State Ownership and Privatization in China - Coursework Example

Planned or Semi-Unplanned Family and First ID Foundation Group Table of Contents Table of Contents 2 Introduction 3 Economic Theory 3 State Ownership and Privatization in China 7 State Ownership and Privatization in Russia 8 Conclusion 8 Bibliography 10 Introduction Competitive forces in the market help to enhance the level of economic welfare. In certain situations where the market fails, only a strong political governing body of a nation can rectify such market failures. Right after abolition of the system of monarchy, the need for a centrally-planned political body was indispensible in every nation. The net social welfare levels of different nations had always been enhanced with the contribution of Socialistic Economic System. In most of the nations, the primary industrial segments were in control of public authorities. Secularism and Democracy were common attributes of all planned economies around the world (Aivazion, Ge and Qiu, 2005). Even so, it was noted that in socialistic economies, the efficiency of resource allocation was minimal. At the same time, the public sector enterprises in various business segments in a nation faced severe operating losses. All such problems and inefficiencies of socialistic economies carved the way for privatization, thereby giving rise to a Capitalistic Economic System. Yet, it was noted that the growth potentials of national products of a country were maximum in presence of a free or Mixed Economic System. In such a system, the public and private authorities are almost equally empowered to participate in the state of economic affairs of the nation. However, the economists and debaters are still analyzing and debating over the relative worth or superiority between a free market system and a centrally-planned one. Economic Theory Socialistic or Planned Economies In this type of a market system, the power to decide over resource allocation and production is only endowed to the government or public authorities. Private business entrepreneurs are not allowed to operate in the core or primary sectors of economies. Rather, the scale and scope of business operations of private authorities are under strict controls of the public regulators. Most of the valuable properties of such economies are considered to be commonly owned public goods. Nearly all economic policies of the government in such economies are directed to maximize the social well-being. The prices of various goods and services produced in such economies are also settled by the public governing authorities. Mixed or Semi-Unplanned In this type of market system, the public as well as private authorities are equally empowered in order to participate in socio-economic affairs of the nations. Rather, the private business enterprises within this market system are subjected to less governmental controls and are allowed to participate in the various core sectors of the economy. Free forces of market demand and supply curves settle the equilibrium prices of majority of goods and services in such nations. Even so, it should be noted that there are some product or service prices, which are still introduced by the government authorities, like, the minimum wages for the labourers (Ocampo, Jomo and Khan, 2007). Perfect Competition This is a market system where the aggregate number of buyers and sellers in the market are infinite. This is the reason for which a single buyer or seller does not have the power to manipulate prices of the concerned products or services. All sellers and buyers in the market are “price takers”. There are also no barriers of entry or exit in such industries. The nature of the product is homogeneous here and thus, the optimal operating strategy for all firms in the market is revenue maximization. All the producers in this type of a market structure experience long run normal profit in business, where the gross revenue equals the gross cost. The firms in this market structure do not incur any sort of advertisement expenses in business. Both the sellers and buyers have complete knowledge regarding the nature and prices of the products. Figure 1: Output and Price Determination in Perfect Competition (Source: Kikeri and Nellis, 2004) Monopoly This is a market structure where there exists no competition in the industry. The industry comprises only a single seller and infinite number of buyers. This single seller enjoys the entire market demand and possesses the power to manipulate prices of the products or services. So, the single seller in a monopoly market is a “price maker”. The product traded in this type of a market system is either homogeneous or heterogeneous in nature. The optimizing behaviour of a monopoly seller in the market is always profit maximization. A monopolist always discriminates among its customers on the basis of the prices charged. With the help of price discrimination, a monopolist always earns a supernormal profit in the long run. This is a situation where the total revenue of a firm is always more than the total cost. The degree of advertisement expenses is zero, even in this type of a market. Though the monopoly seller is well-informed regarding the product quality and prices, the buyers are always not aware of the same. Figure 2: Price and Output Determination in Monopoly (Source: Kikeri and Nellis, 2004) However, it should be considered that net social welfare is maximized in a perfectly competitive firm; on the other hand, the price discrimination of a monopolist creates deadweight loss and reduces net social welfare in markets (Burawoy, 1996). State Ownership and Privatization in China Peoples Republic of China is a developing nation that generally followed strict principles of communism. In the early years, the country experienced a socialistic market system, where the major economic decisions were taken by the public authorities. In terms of gross domestic product, the economy of China is the second largest. However, it was noted by the nation that its competencies in international trading market was significantly falling due to lesser degree of privatization. In order to increase the productive capacity of the economy, the government of China undertook the special step of Open Door Policy in 1978. The marketplaces of the nation were opened for private sector participation. The policy of disinvestment was adopted in the country, where the weak and loss-making public sector companies were taken over by efficient private owned authorities (Blasi, 1997). The degree of Greenfield Foreign Direct Investments started to increase in the nation. Since implementation of the Open Door Policy, China has experienced an annual growth rate of 10% in gross domestic product for the last 30 years. Nonetheless, the growing powers of private sector enterprises in the nation were controlled by strict regulatory authorities of the government. Strict antitrust policies were implemented by the government in order to reduce the intensity of monopolistic powers in marketplaces. State Ownership and Privatization in Russia The market system of Russia was socialistic in nature and had emerged after the collapse of the Soviet Union. In important sectors of the nation like, energy, finance and industry, the scope of privatization increased significantly. The so-called lion’s share of privatization basically came forth in the Russian economy in 1990. Before that period, under the governance of Mickhail Gorbachev in 1980, the strict regulations on private sector enterprises were reduced in most marketplaces of Russia, but it continued to persist in the economy of Soviet Union. Privatization had facilitated high growth rates in markets of the Russian economy and its national product had also increased significantly. However, this progress was not marked in the economic system of Soviet Union because it strictly followed the principles of a planned economic system. It was found that privatization helped to foster the growth rates of both Chinese and Russian economy. The growth rates of the two nations became so high, that on the global forum, they were grouped in the class of BRICS, which denoted the fastest growing economies of the world (Mooney and Law, 2007). The growth rates of both these economies have surpassed the growth thresholds of nearly all developed nations across the world. Some scholars also believe that these two nations would experience a higher income, compared to all wealthy world economies, by 2050. Conclusion The above analysis has helped to conclude that the momentous growths in most booming economies of the contemporary world are strongly due to the boons or blessings of free or mixed market principles. The resources available in the market are always scarce and human wants (that can be satisfied with resources), on the other hand, has always been unlimited. As a result of that, the most important economic problem in a nation is to allocate resources efficiently. It is noted that a Mixed Economic System allocates resources in the most efficient manner in a nation. Thus, in the debate regarding the worth of Planned and Semi-Unplanned (Mixed) Economic System, the house should always go in favour of Mixed Economic System. Nevertheless, it should also be considered that supreme powers of the private sector enterprises must be checked and controlled by the public sector authorities (Michie and Lobao, 2011). Bibliography Aivazion, V., Ge, Y. and Qiu, J., 2005. Can Corporatization Improve the Performance of State-Owned Enterprises even Without Privatisation? Journal of Corporate Finance, 11. Blasi, J., 1997. Chapter 1: Privatisation’ in ‘Kremlin Capitalism: The Privatisation of the Russian Economy. New York: Cornell University Press. Burawoy, M., 1996. The State and Economic Involution: Russia through a China Lens. World Development, 24(6). Kikeri, S. and Nellis, J., 2004. An Assessment of Privatisation. World Bank Research Observer, 19(1). Michie, J. and Lobao, L., 2011. Ownership, Control and Economic Outcomes. Cambridge Journal of Regions, Economy and Society, 5(3). Mooney, G. and Law, A., 2007. New labour/hard labour?: Restructuring and resistance inside the welfare industry. Bristol: The Policy Press. Ocampo, J. A., Jomo, K. S. and Khan, S., 2007. Policy matters: Economic and social policies to sustain equitable development. London: Zed Books. Read More