Chinese Economic Performance in the Long Run - Term Paper Example

Chinese Economic Systems – Before and After the 20th Century Introduction China has today become an important economic force and none of the developed economies can afford to ignore its significance. However, this is not a new position that the country has made for itself. For 18 out of 20 centuries, the country has held this title (elanguageschool.net). Though it produced 33% of the world’s GDP in the early 18th century, it fell behind Europe and the US on account of its reluctance to follow them in their industrial revolutions in the early 19th century. Under the Qing dynasty, the country became the world’s largest economy (elanguageschool.net). They exported tea and porcelain products to various countries but after the 16th century, they lost their position on account of the closed door economic policies of their governments. By the 1950’s, China was producing only 10% of the world’s GDP. However, with the formation of the People’s Republic of China, there was a concentration on export oriented growth and China opened doors to the world. China before the 20th century Early Chinese was an agriculture based economy. The economy was mostly centralized and was dominated by the bureaucratic class. The bureaucracy and gentry of imperial China were quintessential rent seekers (Maddison 2007). The bureaucracy was totally controlled by the various rulers but the bureaucrats had full freedom to run the show in the provinces they were in charge of. Thus, there was complete dominance of the urban life by this class. The lucrative business activities were impeded by the red tape. Hence, most of the big businesses were owned only by the government enterprises. There was to protection for investment by the private individuals. China’s merchants, bankers and traders did not have city charters or legal protection and international trade and intellectual contacts with the western world was completely restricted (Maddison 2007). From the beginning of 18th century till the mid 19th century, the country was plagued with many internal disorders. These rebellions and wars devastated the economy. Some of them were – The Taiping rebellion, the Muslim rebellions in Shensi, Kansu and Sinkiang, wars with France, UK, Japan and Russia (Maddison 2007). The financial sector of the country before 1978 was not developed much. There was only one bank, the People’s Bank of China (PBOC), which was completely controlled by the government (Brandt, Rawski and Lin 2005). This bank received budget from the government and was the sole supplier of money to all government agencies. All government units, military units and cooperatives needed to have an account with this bank (Donnithorne 2008).With the founding of People’s Republic of China, there started a change in the economic direction of the country. They followed the path inspired by the Soviet model which was to create a socialist command economy (Maddison 2007). The reform period The period from 1952 to 1978 is called the Maoist period when there was a complete transformation of the country’s economic structure. The GDP rose three times while the per capita income increased by 80% (Maddison 2007). With increasing investment in health and education, the immense human capital was positively utilized to accelerate production. However, the results were not encouraging enough to compete with the growth of the western economies. From 1978 onwards, the Chinese government set to bridge the gaps that had hindered the economic growth despite various restructuring exercises so far. They reduced the size of the huge production units (especially in the agricultural sector), by giving control to the peasants and breaking up people’s communes. Rural small scale industry was given more importance and non-state sector was able to achieve better efficiencies in production on account of reduced size. The country opened to the world as they realized that the economic isolation had pushed them back over the last couple of centuries. They devalued their currency five-fold between 1980 and 1997 and decentralized the foreign trade decisions (Maddison 2007). They obtained membership of the World Trade organization (WTO) which resulted in the increase in foreign market penetration. Major structural changes that the country made affected the agricultural sector to a great extent. The agricultural sector’s share as a percentage of GDP fell from 60% to 16% between 1952 and 2003, while its share of employment fell from 83% to 51%. The share of industry on the other hand grew from 8% to 52% of the GDP (Maddison 2007). This shows the shift in focus in the 20th century. Commercial activity in the service sector was greatly curtailed before the 20th century. There was a major decline in the retail outlets, peddler trade and sundry convenience trade. However, with the changing economic agenda, by the late 1990’s, private business formed 93% of the retail outlets, 96% of restaurants and 53% of wholesale trade (Maddison 2007). This provided a tremendous boost to employment generation. With the membership of the WTO, China reduced import tariffs to around 29% from an average high of 56% in 1982 (Brandt, Rawski and Lin 2005). The government had imposed many quotas and licenses to further restrict imports till the 1980’s. These were as high as 50% of all import items. However, these quotas were greatly reduced towards the end of the 19th century to as low as 18% (Brandt, Rawski and Lin 2005). The government on the other hand liberalized the right to engage in foreign trade resulting in substantial increase in the number of companies engaged in foreign trade (35,000 in 2001 as against just 12 in 1978) (Brandt, Rawski and Lin 2005). They started providing incentives to exporters to import raw material for export related production. Tariff revenues as a percentage of import value stood at around 2% by 2004 as against a peak of 17% in 1984 (Brandt, Rawski and Lin 2005). China has realized the importance of financial sector reforms in boosting growth. PBOC was split into 4 banks, all catering to different areas of economic development (i.e. foreign trade and investment, capital investments in manufacturing, agriculture and commercial transactions) and entirely owned by the state. Two stock exchanges were also setup in 1990 which have grown very fast. The bond market is however at a very nascent stage of development. Though the banking sector reforms have taken place, the major area of concern for the economists is the high NPLs (non performing loans). These were the loans given to state owned institutions which have entered the 20th century without getting resolved. The disclosure norms for these banks are also not very well defined and hence the exact extent of this problem is not yet known. However, they do hold the potential of washing away all the benefits of the reforms that China has done to push it economy faster (Brandt, Rawski and Lin 2005). Conclusion In conclusion it can be said that China has entered the 20th century with a view of achieving growth through endogenous route. After all the reforms, the country has achieved immense increase in education at all levels, FDI, physical capital and R&D investment. Besides the positive numbers in these indicators of growth, the country has managed to keep its inflation under control with very little variability. However, a lot needs to be done in terms of further improving the banking system, the financial markets and the legal environment of the country. The country was able to fuel this tremendous growth because of the large public savings it had before the reform era. These funds were used to build infrastructure and other investment financing. But the country’s population is now aging and hence, the future would see a decline in these savings. This will also be negatively impacted by increased spending based growth and easier availability of credit. References Brandt, L, Rawski, T, G and Lin, G, 2005, China’s Economy, Retrospect and Prospect, Asia Program Special report Donnithorne, A, 2008, China’s economic system, Routledge elanguageschool.net, Economic History of China, viewed on November 23, 2010 http://learnchinese.elanguageschool.net/economic-history-china Maddison, A, 2007, Chinese economic performance in the long run, OEDC Publishing Read More