The Political Economy of Chinas Development Model - Case Study Example

Introduction China has over the past three decades arrived in the world economy scene with a bang. 70% of its income is from export trade and this has made some people refer to it as the world’s factory of low cost good production, Yong W. (2008). A cursory look in any shop window around the world reveals, more and more, cheap technology products from China, Brezis et al. (1993). Since the 1978 initiated economic reforms to a more open market economy, statistics of Chinese global trade have been of colossal sums of money. However, much as this explosive economic boom is a great of pride from a Chinese perspective, the rapidly growing economic crisis that has besieged world economics calls for a fresh reconsideration of this phenomenal growth. 1While some commentators argue that greedy Wall Street financial firms are to blame, others point fingers much higher at the former chairman of the US Federal Reserve Board Alan Greenspan. Other scholars with socialist orientations see in the entire crisis as the inherent weaknesses of the capitalist system imploding as it inevitably would. It is some of these views that are sampled in this paper. The International Reserve Currency Certain economic analysts in China are angry. They point out that the cause of this crisis is the irresponsibility of the rich Chinese who have thrown good money after bad with crazy speculative investments of foreign reserves on failed foreign financial organizations. Despite these criticisms China has joined hands with the US, Europe and other countries to spur recovery. The measures it has taken include a rescue package of 4 trillion Yuan and increased investment in American treasury bonds. The International reserve currency, usually measured against American dollars, helps to regulate international trade. All countries involved in international trade reserve some foreign currency for the sake of trade with one another. When supply exceeds demand however, a crisis of international proportions arises as is happening today. The strength of international trade relies on stability in the bigger economies such as the US, the EU and lately China. Most money in these economies is kept in the stock market and banking systems. However, when these very systems of currency storage are hit by a depression, the entire world economy is affected, Jacques Rueff, 1971. The factors playing out in China may therefore be too complex for some of its domestic critics to conjecture. But in very simple terms, their country is now a major player in the world economy and crises of this nature come with the territory. One cannot be a huge investor in world business yet they are not ready to face such consequences. Several explanations for this economic crisis have been propagated by different people. The Socialist Perspective The core economic argument of socialism is that it aims to widen, to enrich, to promote the existence of the laborer, Marx C and Engels F 2006. Any economic system that does not improve the lot of the lowest in society is therefore unsustainable. The argument goes further to show that socialism emphasizes on the production of goods for their utility value while capitalism is aimed at overproduction for profit. 2Marx refers to this kind of production as commodity fetishism. This state of affairs he says leads to excessive production and consumption at the expense of energy reserves and the environment. Socialist scholars quote George Bush in his speech of September 21, 2001 after the twin tower attacks when he urge the nation to “go shopping” as a means of helping the economy to recover from the economic aftermath of the attacks, Ramo J. C. 2004. According to the socialists, this kind of economy ultimately leads to collapse when the common man can no longer afford to consume at the same rate as production is done. China itself has communist history and some of its apologists are quick to point out that the crisis is the result of adopting an open market economy. While overproduction and consumerism are real factors in the current economic crisis, what such critics cannot deny is that it is the very market reforms adopted from the west that have led to the phenomenal growth of China. Variations In Development Approach: China Vs Eastern Europe The paths of economic development taken by China and Eastern Europe differ greatly. This has directly impacted on the economy of the two regions and the global economy in general Hare, P. 1994. While both are former communists, China has adapted an open market approach in the economy while it has still maintained political communist leadership. Eastern Europe has seen the fall of communist dictatorships but has not really opened up its markets. Instead the latter opted to sell the public sector to the nomenclature or favored class. 3The ambivalence here is that while China has grown its economy exponentially, Eastern Europe still lags behind. Yet China left its public sector largely intact while liberalizing the private sector. There emerge here two types of privatization. Where repression is low politically, nomenclature privatization takes place to help protect vested interests of the ruling class, Lipton, D. and J.D. Sachs. 1990. Where repression is high, the rulers tend to adopt social privatization which liberalizes the private sector while leaving the public sector intact, Ibid. The end result of the two models is that China has grown fast, since an oppressive regime can ensure quick growth but is likely to face economic problems in the long run. This is because autocracy has its limits as has been witnessed in South American countries such as Chile. The Eastern Europe model is more sustainable in the long run, but in the short term the nomenclature slow down the economy as they protect their interests, Gelb, A.and I. Singh. 1994. Banks and Credit The banking and credit system has gone Haywire. In the us people took loans and mortgages they did not need and could not possibly repay, while banks, well aware of these facts pushed such loans anyway, (President Barrack Obama: Addressing Congress, February, 2009). Banks like other business institutions aim to maximize profit. One easy way of doing so is to provide loans which are the repaid through check-off deductions from the clients wages. In a bid to increase profits therefore they target things like the public’s need for housing to push these loans. They also fund projects of suspect viability knowing that they can always recover their money by selling off collateral. By generally pushing bad business ideas and oversupplying currency, banks have contributed in a major way towards the current global economic crisis. The dilemma the US economy finds itself in right now is the need to resuscitate banks to avoid worsening the already bad economic situation when people lose their savings in the event that such banks collapse. Ironically, the banks are as much to blame for the crisis as anyone can possibly be. 4Another paradox of this situation is that as the US moves in to bail out banks, China has been doing its damned best to get its money away from banks. As China adopts a transition to a more market oriented system, it is forced to undertake reform of the financial sector. Part of this reform is to free up the banking system, which is tricky considering that there is still an implicit assumption that government insurance of bank deposits is still in force, Friedman T. 2008. This scenario can result in financial chaos with the resurgence of non performing loans. It would take enormous amounts of money to rectify this situation, hence the urgent need for the government to get out. What China is trying to avoid is exactly the situation playing out in the US where the chaos is already there and government is running to the rescue. Challenges Of Economic Growth Apart from the banking issue, one of the main perils of rapid economic growth such as China has had, is challenge of keeping tight controls on the movement of capital Gregory Fossedal 1992. Increasing numbers of domestic and international investors come up with an endless bag of tricks on how to evade such controls, Lohmann, S. 2000. Money laundering and tax evasion are some of the new developments China finds itself increasingly dealing with. 5Channels such as expanding trade and maintaining a fixed exchange rate provide easy loopholes for such artists. On the other hand flexible exchange rates can also provide a loophole for evading taxation. In either case it is easy to give wrong figures in financial declarations based on the known exchange rates, rather than the actual rates of a given transaction, Gelb, A., Jefferson G. and I. Singh. 1993. Another immediate challenge to a growing economy such as China’s is fiscal policy reform Charles G. Leathers and J. Patrick Raines 2004. It is important in China’s situation to provide safety nets in its policy to reduce the political and social costs of market reforms. These include directing of spending towards important sectors like health care and education in order to release household expenditure for general consumption, The next major challenge facing China is of course the issue of environmental degradation Oliver C, 2009. In the run up to the 2008 Beijing Olympics one recurrent issue that kept coming up is the issue of pollution. Beijing was said to be one of the most polluted places on planet earth and it was feared that this might affect the performance of the athletes at the games. Heavy smog and impure air are some of the rewards that excessive industrialization has bestowed on China. Massive amounts have to be spent by the government time and again to try and normalize the situation, Ferrero, M. 2001. Lastly, an enduring accusation that faces China from the developed world is that in their drive for economic success, they have established relationships with countries with poor governance and human rights records. In this way they run the danger of inadvertently reviving old despotic regimes and dictatorships detrimental to human freedom. The country therefore faces the challenge of delicately balancing its economic and international relations interests. Past experience has proved that supporting growing economies without questioning their human rights and governance records easily allows such autocracies to sprout. Conclusion 6Though the economic growth of China is another phenomenal example of what a country can achieve with economic and social reforms, and the Chinese certainly have a right to celebrate their economic success, measures must be carefully put in place to tackle some of the issues above. Otherwise, huge as it is, China may find itself facing some of the problems that the other Asian tigers faced after expansion that was too rapid. Given its sheer size, a huge chunk of the world in which it has invested would go down with it. References Blanchard and Giavazzi, 2005; Brezis, E. S., Krugman P. and D.Tsiddon. 1993. “Leapfrogging in International Competition”, American Economic Review, December, pp.1211-19 Charles G. Leathers and J. Patrick Raines 2004: “The Schumpeterian role of financial innovations in the New Economys business cycle”, Cambridge Journal of Economics Ferrero, M. 2001. “Political Exchange in Mass-Party Regimes and the Transition from Socialism”. Economic Systems, 25(4): 365-79. Friedman Thomas, 2008 Aug. 31: “Postcard from South China”, the New York Times Gelb, A.and I. Singh. 1994. “Public Enterprise Reforms in Transitional Economies” Policy Research Department, World Bank, Washington DC. Gelb, A., Jefferson G. and I. Singh. 1993. “Can Communist Economies Transform Incrementally? The Experience of China.” Economics of Transition 1(4): 401-35. Hare, P. 1994. “Privatization in Comparative perspective: an Overview of the Emerging Issues,” in Estrin, S. ed. Privatization in Central and Eastern Europe. Longman Group: London. Gregory Fossedal 1992: “The Lehrman-Mueller Hypothesis. A New Theory of Deficits, Stagflation, and Monetary Disorder”, Policy Review, Winter Jacques Rueff, 1971. ‘The Monetary Sins of the West’, Paris: Plon Lipton, D. and J.D. Sachs. 1990. “Privatization in Eastern Europe: the case of Poland” Brookings Papers on Economic Activity, 2: 293-341. Lohmann, S. 2000. “Collective Actions Cascades: an Informational Rationale for the Power in Numbers,” Journal of Economic Surveys, 14:655-84. Marx, Karl and Frederick Engels. 2006. /Manifesto of the Communist Party. Edited by Rick, Penguine, New York Oliver Christian 2009. , March 7,: “Seoul to create eco–friendly jobs”, Financial Times President Barrack Obama: Addressing Congress, February, 2009 Ramo, Joshua Cooper. 2004. /The Beijing Consensus: Notes on the New Physics of Chinese Power./ London: The Foreign Policy Centre. Accessed on March 15, 2009 at http://fpc.org.uk/publications/123. Yong W. 2008, http://globalasia.org/pdf/issue8/v3n4_Yong, retrieved March 13, 2009 . Read More