The Chinese Economic Growth - Essay Example

?How will China look to sustain economic growth in the future? China has shown striking changes in the sphere of economic growth since her economic reforms in the year 1978. The country has demonstrated a high rate of economic growth for more than 20 years since its policy reform. The economic reforms undertaken by the country paved way for incentives and institutions, which is a necessary pre-requisite for any economy to grow. The nation encouraged the establishment of ‘rural enterprises’ and ‘private business’, “liberalized foreign trade and investment, relaxed state control over some prices”, endowed money in industrial production and the trained its labor force to awaken the dormant economic giant. (Hu and Khan, 1997: Harder, 2010, p.1) The nation has been able to sustain the growth inspite of minor fluctuations. The economy had been experiencing a 6 percent annual growth before it underwent an economic reform in 1978, which changed to 9 percent post reform. It witnessed a above 13 percent per capita growth in its peak years- a nearly quadrupled figure. The country experienced a growth in its capital accumulation in the form of ‘stocks of capital assets’ and the setting up of new factories, developing machinery, and logistics systems which was an important factor in the growth of the economy. The growth in the number of Chinese workers also resulted in a sharp and sustained increase in the productivity, which was also a major factor for the economic growth of the country. The key driving force of the growth has mainly been the unremitting expansion in the production of the economy, which accounted for more than 42 per cent during the period 1979-94. This also broke the traditional myth that an economy can only grow with the growth in its capital accumulation. Many previous researches on economic development have marked the importance of capital accumulation in the growth of the economy, but research on China’s economic development came up with a surprising result, where the major force in driving the economic growth has been the higher productivity of the country. Its productivity grew 3.9 percent annually during the period 1979-94 compared to the 1.1 percent growth during 1953-78. The share of productivity in growth of output went beyond 50 percent while the capital formation share fell below 33 percent. It has been argued that productivity driven growth are more sustainable and the ‘market oriented reform’ taken up by the country had resulted in creating the ‘productivity boom’. The reform brought in the introduction of ‘profit incentives to rural collective enterprises, family farms, small private business and foreign investors and traders’, which stimulated the efficiency of the economy. Many enterprises were also exempted from the state authority intervention, which resulted in an increase in the share of the collective enterprises from 42 percent to 50 percent and the share of the private business and joint ventures from 2 percent to 10 percent, while the output of the state owned enterprises declined from 56 percent to 40 percent. The profit motive of the producers increased the investment in their business in order to improve its performance. Reforms in the economic policy had also extended property rights in the countryside as the rural people started of non-agricultural business. The post reform period was marked with more competent use of labor and more fruitful farms as a result of de-collectivization and high priced farming products. This resulted in fast growth of village enterprises driving many people into ‘higher value added manufacturing sector’ from the ‘traditional agricultural sector’. The reform granted the enterprise managers with greater freedom as they were free to place their own production goals, sell the products in the private market with competitive prices, and give bonus to the employee who works better and fire the one whose performance is not good. The reform also entitled them to retain some of the firm’s earnings for further investments. The reform also created scope for private ownership of production, which generated jobs and developed much wanted consumer products. This privately held business in turn helped in earning foreign currency through foreign trade and increased the revenue of the nation as well as they paid the state taxes. (Hu and Khan, 1997; Riedel, Jin, Gao, 2007, p.ix ) China also experienced an economic transformation due to the inflow of foreign investment in the country. The foreign direct investment amounted to around US$100 billion in 1994, which was almost negligible before 1978. There was a rise in the annual inflow from less than 1 percent in 1979 to 18 percent in 1994. The foreign money that flowed into the economy had led to the growth of the economy in terms of establishment of more factories, which in turn generated job; it also connected China to the international markets, and led to the most important transfer of technology. During the period 1981-1994 the export of the country rose 19 percent, which fueled the growth in productivity of the domestic industries. (Hu and Khan, 1997) China had been a country with high savings, but that did not contribute to its economic growth before the reforms because of the low efficiency in its investment. China’s economic accomplishment has come with an optimistic result. ‘Distorted price system and ill conceived economic theory’ resulted in such low efficiency. (Tisdell, Chai, 1997, p.140). In the post reform period one of the major factors that influenced China’s development was the high level of investment due to the high savings rate. It created a fruitful and unique path to transform its ‘centrally planned economy’ into a ‘market economy’. China’s economic growth and the necessity to uphold the high growth rate in the future have motivated the Chinese policy decision not only in the economic sphere but also in the political and foreign policy arenas. The sustainability of the economic growth is desirable because that would ensure an increase in the standard of living of the people of China and most importantly it would ensure political stability. To maintain the economic growth China has invested above two trillion Yuan to meet its renewable energy target by 2020, which aims at cutting down the green house gas emissions. China’s 70 per cent energy is powered by coal so they are looking into renewable source options like ‘hydropower’, ‘solar’,  ‘wind’, ’bio fuels’.   The country aims at increasing the capacity of the ‘hydropower by 190 million kilowatts, solar power by 29 million kilowatts and wind power generation by 1.73 kilowatts’ between the periods 2006-2020. The long term and the medium term target of the country are to boost the renewable energy business. Chen Deming, the vice president of NDRC (National Development and Reform Commission) is of the opinion that investing in the renewable energy sources can make the country sustain its future economic development. (Rekha, 2007) Till date China had done a good job of transforming the nation from rural to urban nation smoothly. Besides the economic growth of the urban areas, it also witnessed physical extension. China has flexibility in zoning, which implies that the city is adaptable to the budding global urban planning. These trends are characterized by creating cities that are densely populated, suitable for walking and are connected with efficient public transportations systems. Effectual organization of waste materials, bringing down crime rates and the making the city green and beautiful are also included in this trend. (Mayer, 2011) Ever since the economic reform in China in 1978, it has witnessed a rapid economic development for more than two decades. But adequate policy has to be taken up by the government to ensure the sustained growth of the country. If China can grab the opportunities and take actions to anticipate problems arising from development and maintain rapid economic growth, its economic strength will move to a newer height. In future the development of the Chinese economy will face a changing internal and external environment accompanied by several ‘opportunities and challenges’. The interaction of these uncertain factors will lead to an uncertain pace of economic development in the country. On the basis of scenario analysis to simulate the prospect of economic development of China, Yanrui Wan has come to a conclusion that the Chinese economy will maintain a rapid growth during the 11th 5-year plan with an average annual growth rate of about 8 percent. The Aggregate GDP at the end of the 11th five year plan will reach to 2.4 trillion US dollars and that the per capita GDP will be about 1700 US dollars. In comparison to the 11th five-year plan period, the economic growth will be slightly slower in the period 2010-2020 with an average annual growth rate of about 7 percent. The driving force in this rapid growth will be the capital accumulation, which will contribute 63.5 percent in the GDP. The deepening industrialization and urbanization during the 11th five years plan will continue to the adjusted industrial structure in 2010-2020 planning period. But this has been also noticed that China may face a probable slowdown in its economic growth owing to the negative impact of “trade frictions on trade flows”, “lower rate of savings”, “the slower rate of capital accumulation” and “higher system costs arising from system contradictions”. (Wu, 2006, 105) The ability of China to retain its economic growth rate will largely depend upon its capacity to guarantee continuous energy supplies for its ever mounting needs. The dependence of the country on foreign oil can bring with it economic and political pressures which in turn can threaten the national security of the country. The nation has to ensure constant economic affluence that will affect directly its nationwide interests and security. This is a reason China should develop its ‘comprehensive national power’ which will ensure a peaceful rise in the rapid and sustained economic growth.  The ‘national development strategy’ was initiated in 1978 by Deng Xiaoping to achieve the comprehensive national power to avoid world conflict. For the development of national power it will be important for China to focus on maintaining ‘national unity’ and ‘internal stability’. Besides gaining the economic power China also focuses on development of military power, which would increase China’s power to protect national interests, and thereby protect China’s global policy. The security strategy taken up by China is based on the policy of protecting its own national interests, thereby wisely employing its national resources politically and economically. (Sandano, 2011; Perkins, 2005-2006, p. 365) From the above discussion it can be very well concluded that China has made its mark as an eminent economic power through its economic growth from 1978 and will continue to do so in the future as well. The economic and political policy taken up by the Chinese government has to be made in a way that overcomes minor issues of trade frictions and internal instability. Steps have to be taken to come with an alternate source of energy for the growing need of the populace of the country.                                       References: 1. Hu, Z and M.S. Khan, (1997) Why is China growing so fast?, International Monetary Fund- Economic Issues, Issue no 8, available at URL:   http://www.imf.org/external/pubs/ft/issues8/index.htm (Accessed on April 29, 2011) 2. Tisdell, C.A and C.H.Chai, (1997) China’s Economic growth and transition, Nova publisher. 3. Rekha (2007), China Banks on renewable Energy to sustain economic growth, Eco friend, available at URL: http://www.ecofriend.com/entry/china-banks-on-renewable-energy-for-sustaining-economic-growth/ (accessed on April 30,2011) 4. Mayer, A.(2010) Urbanizing towards a clean and sustainable future, Sustainablecitiescollective, available at URL:  http://sustainablecitiescollective.com/chinaurbandevelopmentblog/21619/urbanizing-towards-clean-and-sustainable-future (accessed on April 30,2011) 5. Sandano, I.A.(2011), China: A rising power, Pulse, available at URL:  http://www.weeklypulse.org/details.aspx?contentID=101&storylist=2 (Accessed on April 30,2011) 6. Wu, Y, (2006), Economic Growth, Transition, and Globalization in China, UK, Edward Elgar Publishing. 7. Harder,S. (2010), Innovation and Economic growth In China- Evidence from patent Statistics,  Grin Verlag. 8. Reidel J.,Jin J and J. Gao, (2007), How China Grows: Investment, Finance and reform, USA, Princeton University Press.  9. Dwight, P., (2005-2006), Military modernization, Strategic Asia 2005-2006, from the URL: http://www.nbr.org/publications/strategic_asia/pdf/Preview/SA05/SA05_ChinaBudget_preview.pdf (Accessed on April 30,2011) Read More