Economic, Political and Technological Factors That Have Turned China into a Fast Emerging Economy - Assignment Example

?Economic, political and technological factors that have turned China into a ‘fast emerging economy’ Introduction In the past few decades, China has witnessed two major transformations that have combined to produce extraordinary results for the country’s growth and development. The two changes as recently witnessed in China are its emergence as an industry based urban society from being an agriculture based rural society, and from a having a ‘command economy’ to acquiring one that is more ‘market-based’ (Freedman, 2004). The rapid economic development has been made possible by large foreign direct investments, rise in productivity, political reforms and technological advancements (Lampton, 2008). Owing to these transformations, there has been a sharp rise in China’s economic growth, where national poverty figures moved from being more than 65 % to below 10 % within three decades, wherein nearly 500 million people were removed from below poverty level and the country managed to meet a majority of their Millennium Development Goals (World Bank, 2012, p. 4). While rate of growth varied across the country, the growth was sharp in almost all parts and the 31 provinces that came under mainland China (if considered to be independent economies) were seen as a part of the world’s 32 most rapidly growing economies (World Bank, 2012, p.4). Owing to the sharp economic growth, currently “2 of the world’s top 10 banks are now Chinese; 261 Chinese companies are on the Global Fortune 500 list; and China is home to the world’s second-largest highway network, the world’s 3 longest sea bridges, and 6 of the world’s 10 largest container ports. The country has also made large strides in health, education, science, and technology” (World Bank, 2012, p.4). Various factors lie behind China’s strong socio-economic growth, which includes various economic, political and technological factors. The paper reviews the various aspects that have enabled China to become a ‘rapidly developing economy’ or ‘fast emerging economy’ in the past three decades. Discussion What is a fast emerging economy? While there are no clear delineations of the term ‘emerging market economy,’ it is generally characterized by rapid growth of economy, increasing foreign direct investment (FDI), and greater political power at a global level (Williams, 2011). Rapid economic growth is evinced by a country’s economic figures, such as trade volumes, foreign reserves, higher gross domestic product (GDP), and GDP per capita. Thus, a fast emerging economic growth translates into increasing financial gains for foreign investors that in turn brings in more foreign investment into a country, which supports rapid economic growth. In order to attract more foreign investors, countries aim at framing effective macroeconomic policies that are open to global trade. Emerging Market Economies tend to be more open to global trade with business models that are export oriented, and these models later serve to variegate the products and services exported by the country. Economic experts contend that diversification and integration of national economy into the global economy help in decreasing after-effects of sharp fluctuations within global prices or economic crises, thus bringing stability for the country that in turn attracts more foreign investors (Williams, 2011). In the context of framing sound macroeconomic policies that influence wider aspects of a country’s economy, it can be suggested that effective policies help in stabilizing cash flows, which keep foreign investments safe. Sound macroeconomic policies include liberalisation of national banks, privatisation of public enterprises, and opening up of stock markets in order to give easy accessed to foreign investors, decrease in external debt and framing sound monetary and fiscal policies. Since the start of economic reforms during late 1970s, China has slowly turned into one of the fastest-emerging economies of the world. A look at China’s economy reveals that starting from the late 70s (after implementation of ‘reform and opening’ economic policy) until the late 90s (1979 to 1997) the annual growth of GDP was 9.8% even during the Asian economic crisis, and in 1998 the GDP showed constant growth at 7.8%, while in 1999 the rise was slowed down to around 7.1% (China's GDP to Top Nine Trillion Yuan This Year, 2001). From 2000 it again increased rapidly to 8% and just prior to the global financial crisis in 2007 the figures showed a high rate of 11.4%, and its “GDP rose from Rmb362.4 billion in 1978, at the start of the reform period, to Rmb30 trillion in 2008” (GDP growth in China 1952-2011, Chinability, 2011). A study of the 2010-11 financial reports revealed that China stands second after the US, as regards global trading (Zinzius, 2004). Its GDP rates, which declined during 2007-08 global economic crises, have started rising again from 2009 onward, placing its economy just after the US. Thus, the figures (as shown in fig 1) undoubtedly place China as a nation with the highest economy growth and “from 1989 until 2010, China's average quarterly GDP Growth was 9.31 percent reaching a historical high of 14.20 percent in December of 1992” (Trading Economics, 2010). Fig 1: The graph represents rate of China’s GDP. After a decrease during 2007-08 economic downturn, the figures showed an upward movement from 2009 onward (Trading Economics, 2010). Experts contend that if China maintains its current rate of growth, then by 2020 China would alone account for 37% of global GDP rise (taking into account figures from 2005-2012), and that figure would be more than GDP rates of all OECD nations clubbed together (Dollar, 2007). These figures clearly indicate China is a ‘fast emerging economy’ that holds a great deal of market opportunities for foreign investors and a large potential for economic growth owing to a huge consumer base and cheap labour costs. In the next segment, the paper examines various economic, political, and technological factors that have influenced economic growth in China. Economic and political factors As per the Chinese Constitution, China is a socialist state under political dictatorship of Communist Party of China (CPC), which is the only powerful party within China’s political scenario. During the rule of Mao Zedung, China’s foreign and economic policies were against globalisation and they followed an autarchic pattern (Dellios, 2005). China under Mao’s regime stood against the global political power orientation and opposed major global economic institutions like IMF and World Bank. The Chinese communist political order at this time focused on spreading disorder using insurgent tactics, both in neighbouring countries and worldwide, while domestic economic conditions were at the brink of a major downfall. It was only when Deng Xiaoping came to power (after Mao’s death) that various economic and political reforms were implemented in favour of free trade, which promoted rapid economic development on China (Medeiros and Taylor, 2008). China’s current surge in economic conditions has occurred mainly due to three primary factors, favourable conditions for trade and commerce after economy became free during the late 1970s; appropriate and well framed structural changes; and strategic implementation of their new trade and foreign policies (Miller, 2006). Primarily, its success was owing to the various economic policies and reforms that made opened up China’s market and helped it enter the league of ‘rapidly emerging economy.’ Right from the time it started economic reforms, China had surplus human labour resources, owing to its large population. Coupled with it, a low-wage labour resource that was efficient in nature also helped China to acquire its current state of a ‘rapidly rising’ economy. The nation’s location also turned out to be favourable, which provided various economic advantages, such as producing consumer items, ‘sale economy’ of consumer items, while earning ‘spill over’ drifts from its neighbouring countries (Samuel, 1999). Besides the various economic reforms that brought in free economic trade, the Chinese government also framed many developmental policies that changed its socio-economic life standards. During the later 70s, there occurred large-scale privatization of all forms of farming, the political order developed policies in which investments from household savings (in rural centres) could be made in local trade and transport that gave rise to Town and Village Enterprises or TVEs. Other trade related reforms that helped China to acquire its current status within world economy, included fiscal changes, de-bureaucratization of their commerce and trade departments, various changes in tariffs related to unilateral trade activities, and finally with the nation acquiring WTO membership. The changes initiated in the 1970s had long-term objectives, which were implemented slowly and in parts that allowed domestic economy to acclimatise to the more powerful foreign economy forces entering local Chinese market due to reformed market policies (Shuisheng, 2008). Chinese reformed trade policies practiced ‘dualism’ where trade reforms were amalgamated with local practices and cultural beliefs (Devlin, 2005). Currently China’s political order maintains a strong coordination with its market economy, where the political classes are cognizant of the fact that they would remain in power as long as they are able to maintain economic growth, provide jobs for all, and alleviate overall (not just in urban centres) poverty (Hughes, 1997). Besides the political reforms, another major factor for China’s recent rise to global power is FDI. China is one of the major recipients of global FDI in the past few decades, and it accounts for almost 58% of China’s global trade, 4.1% of its revenue earned from national taxes and 27% of its value-added production. FDI, also known as renminbi foreign direct investment in China, has shown a sharp rise in the last decade, and in 2010 reached nearly $85 billion in 2010 (Greyhill Advisors, FDI by country, nd).  FDI into China decreased in 2009 due the 2007-08 economic crises, but again increased in 2010 (Greyhill Advisors, FDI by country, nd). In the first half of 2012, China acquired more FDI ($59.1 billion) than the United States ($57.4 billion) (China tops U.S. as investment target in 1st half 2012: U.N. agency, 2012). More than 190 countries from various parts of the world have made diverse investments in China, including 450 business firms that are a part of the global Fortune 500 companies. According to a survey conducted by Member Priorities Survey, a large number of the US companies that have made various investments in China aim to target the local Chinese market, and not export products and services back home (2009 Report to Congress of the U.S.-China Economic and Security Review Commission, 2009). According to a recent estimate in 2009, the total percentage of shares held by Japanese, European and US multinational firms in Chinese exports was less than 10%, while majority of the exports take place from companies based in Taiwan, South Korea and Hong Kong (2009 Report to Congress of the U.S.-China Economic and Security Review Commission, 2009). Nearly 75% of the business firms from developed nations operate in China in order to serve the large domestic market, and survey reports reveal that nearly 81% of firms operating in China make large-scale profits (Foreign Investment in China, 2007). Outbound FDI in China has also been rising persistently, and various economic reports showed that by 2006 outbound direct investment was nearly $73.3 billion (Foreign Investment in China, 2007). Another factor that promoted China’s emergence as an economic power was its large foreign exchange reserves. Its foreign exchange reserves were very low in 1978, however increased rapidly once it became a WTO member in 2001, which contributed to rise in export, imports, and increased FDI inflows. In 2009 China was one of the holders of highest reserves of foreign exchange currencies that accounted for nearly $2.13 trillion, including US treasury bonds that accounted for nearly $800 billion (China’s Foreign-Exchange Reserves Surge, Exceeding $2 Trillion, 2009). China became a member of WTO in order to become competitive within the arena of global trade market (Prime, 2002). China’s chief exports comprise of electronics, garments, textiles and manufactured goods (China, 2011). China’s ‘foreign trade dependence’ in 2007 was almost 72.4%, while it was 55.1 % for France, 61.6 %, for the UK, 48.8 % for India and 26.8 % for the US (World Bank, 2009, pp. 340-42). Currently China is the second-largest trading nation, standing only next to the US. Technological factors The number of people living and working in a country does not ensure rapid economic growth. While a country may be rich in natural resources and have strong labour resources, if it lacks a basic framework for innovative technologies, economic growth would remain stunted. Thus, here it can be suggested that technological innovation in one of the major factors that decide the economic progress of a country. Technological advancement in terms of production, exports and development are making rapid progress in China (Preeg, 2008). There has been an “annual growth in research and development (R&D) expenditures of 20 percent since 2000, more than 600,000 college graduates per year in engineering and computer sciences, and 20 percent or more annual growth in patent applications and science and engineering articles. Chinese exports in their definition of “Hi-tech products” doubled from $166 billion in 2004 to $348 billion in 2007, with a surplus of $61 billion in the latter year” (Preeg, 2008, p. 1). In a 2005 report, it was derived that China has made large-scale investments in researches dealing with nanotechnology (The Report of the Task Force on the future of American innovation, 2005). Government tends to promote the technology with a strong focus on small to medium-sized companies, which gives it a lead in making commercial products where nanomaterial, are used in making lubricants, porcelains, plastics, rubbers and textiles, and China is already considered the global leader in the application of nanomaterial (Appelbaum, and Parker, 2008). The same 2005 report also derived that China is making large-scale progress in the field of biotechnology, involving medical sciences and genetically modified or GM crops, mainly for the domestic market (The Report of the Task Force on the future of American innovation, 2005). Approved GM crops in China include papaya, pepper and tomatoes, while tests are underway for tobacco, cotton, wheat, corn, rice, cauliflower, cabbage, melon and soybeans. Despite researches being conducted mainly for the domestic markets, it has been estimated that biotechnology in China could turn into one of the fastest growing industries within the next two decades (Davoudi, 2007). Specific areas that involve wide scale innovations include high performance computers, semiconductor design, software application and equipment for telecommunications. Besides these, technological innovations in China also include the automation and pharmaceutical industries. Conclusions and recommendations While various innovations in the arena of telecommunications and information technology have been the topmost priority for all technology oriented economic transformation seen in China that made it into a current global power. However the exact nature of the work going on in this field remains vague owing to lack of adequate reporting and the role of foreign firms in this line of innovation are especially unclear and require further research. China is a fast emerging economy infused with rapid development in its technological and industrial arena. The primary aspects that helped in this rapid growth are related to various economic factors, political reforms and technological advancement. Being one of the world’s largest trading nations China will remain an important trade ally of a majority of the developed nations. It is therefore necessary for the western world to comprehend the various economic, political, and technological factors that have led to the meteoric rise of the country and comprehend the differences that exist between China’s political and economic conditions and the conditions that prevail in the western world, in order to understand their influences on business practices. Despite the liberal economic policies, which have undoubtedly strengthened the economy of China, the nation still lack basic infrastructure in terms of inadequate energy resources, communication systems, and transportation, facilities. China’s human development index is 0.777, which reveals disparity between urban and rural China. China has also received widespread global criticism for perpetrating human rights abuse under the present political order. Other issues include corruption within the government and environmental deterioration that the government must necessarily control to improve its socio-economic conditions (People’s Republic of China Infrastructure, 2009). A constant struggle between local and central governments over the nature of the law that can be made applicable makes it exceedingly difficult for foreign corporations operating from China to understand the correct application of the existing rules (China Political Risk Management, 2009). Thus, it is necessary for the government to frame clear laws and regulations for making business operations more transparent. Some economists contend that China could become the largest economy in near future, if the ruling political order continues to expand the undertaken economic reforms and bring in more changes, especially in the context of the state owned banking systems and state-owned enterprises (SOEs) that are a complete failure. A greater challenge for the Chinese authorities lies in reforming domestic economy of the country. Right from the time of the Cultural Revolution, it has always been a priority for the political order in Beijing is to maintain political stability, which has been possible until now by following a pliable attitude towards personal wealth and a period of more three decades of sharp economic growth. However, currently some major imbalances have become apparent and experts have claimed that the model that helped China to acquire the current economic status is fast losing steam. The Chinese economy now must create a self-propelling growth within the scope of its domestic demand in order to maintain the strong economic growth. The large gap that exists between the have-nots and the haves must also be lessened, while addressing the disparity that exists between wage earners is another important issue that the government must handle in order to maintain its current economic growth. In the last two decades, disposable income has failed to rise as sharply as the nominal GDP growth, which shows an economic growth not suitable for inflation and a rise in standard of living resulting in fall of GDP rates. After the global economic downturn of 2007-2008, demand for Chinese goods has gone down dramatically all over the world. Furthermore, experts claim that from a demographic view the nation’s stringent one-child policy will start showing negative results from 2015 onwards. Thus, the government must bring in more reforms addressing these various issues in order to maintain the current rate of economic growth. References Appelbaum, R., and Parker, R., 2008. China’s Bid to Become a Global Nanotech Leader: Advancing Technology through State-Led Programs and International Collaboration. Science and Public Policy, 35(5): 319-334. China's GDP to Top Nine Trillion Yuan This Year, 2001, [online] available http://english.people.com.cn/200111/27/eng20011127_85410.shtml [accessed 3rd December 2012] China’s Foreign-Exchange Reserves Surge, Exceeding $2 Trillion. Bloomberg News, July 16, 2009. [Online] available http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alZgI4B1lt3s [accessed 3rd December 2012] China, 2011. [Online] available  http://trade.ec.europa.eu/doclib/html/113366.htm. [accessed 3rd December 2012] China tops U.S. as investment target in 1st half 2012: U.N. agency, 2012. Reuters. [Online] available, http://www.reuters.com/article/2012/10/24/us-china-us-investment-idUSBRE89N0EZ20121024 [accessed 1st December 2012] Davoudi, S., March 15, 2007. China to Quadruple Agri-Biotech Spending. FT. [online] available http://www.ft.com/cms/s/0/bfaaa2c6-d31c-11db-829f-000b5df10621.html#axzz2EC5JA1tr [accessed 3rd December 2012] Dellios, R., 2005. The rise of China as a global power. The Culture Mandala 6 (2).  [online] available http://www.international-relations.com/CM6-2WB/GlobalChinaWB.htm Devlin, R. (Ed.). 2005. The Emergence of China: Opportunities and Challenges for Latin America and the Caribbean. Inter-American Development Bank. Freedman, L., 2004. “China as a Global Strategic Actor.” In, Bary Buzan and Rosemary Foot (eds.), Does China Matter? A Reassessment: Essays in Memory of Gerald Segal. London: Routledge Foreign Investment in China, 2007. USCBC, [online] available, https://www.uschina.org/info/forecast/2007/foreign-investment.html [accessed 3rd December 2012] GDP growth in China 1952-2011, 2011. Chinability, [online] available http://www.chinability.com/GDP.htm [accessed 3rd December 2012] Greyhill Advisors, nd. FDI by country. [Online] available, http://greyhill.com/fdi-by-country/ [accessed 1st December 2012] Hughes, C. 1997. Globalisation and Nationalism: Squaring the Circle in Chinese International Relations Theory. Millennium: Journal of International Studies 26 (1), 103-24. Johnston, A. 2008. Social States: China in International Institutions, 1980-2000. Princeton, N.J.: Princeton University Press. Lampton, D., 2008. The Three Faces of Chinese Power: Might, Money, and Minds. Berkeley, Calif.: University of California Press. Medeiros, E., and Taylor E. November-December, 2008. China’s New Diplomacy. Foreign Affairs 82 (6), 22-35. Miller, L., 4th May 2006. China as an Emerging Superpower. Stanford Journal of International Relations. [online] available http://www.stanford.edu/group/sjir/6.1.03_miller.html [accessed 1st December 2012] Prime, P., April 2002. China joins WTO: How, why and what now? Business Economics, 26-32. 2009 Report to Congress of the U.S.-China Economic and Security Review Commission, [Online] available http://www.uscc.gov/annual_report/2009/annual_report_full_09.pdf [accessed 1st December 2012] Samuel. S., 1999. “China and the United Nations.” In, Elizabeth Economy and Michel Oksenberg, (eds.), China Joins the World: Progress and Prospects. New York: Council on Foreign Relations Press. Shuisheng, Z. April 2008. Chinese foreign policy in Hu’s second term: Coping with political transition abroad. Paper presented at the FPRI Asia program’s conference on elections, political transitions and foreign policy in East Asia. Philadelphia. The Report of the Task Force on the future of American Innovation, 2005. The Knowledge Economy: Is the United States Losing Its Competitive Edge?. [Online] available http://nanotech.sc.mahidol.ac.th/doc/WakeUpAmerica.pdf. [Accessed 2nd December 2012] Trading Economics, 2010. China GDP growth rate. [Online] available http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY [accessed 2nd December 2012] World Bank, 2012. China 2030. Conference edition. [Online] available, http://www.worldbank.org/content/dam/Worldbank/document/China-2030-complete.pdf [accessed 1st December 2012] Zinzius, I., 2004. Doing Business in the New China: A Handbook and Guide. Westport, CT: Praeger. Read More