The Chinese Economy: How China Grew Rich - Research Paper Example

Introduction: In most developing countries, foreign investments are an instrument of development. This is because foreign investors provide capital in a larger quantity, in comparison with local investments. Developing countries believe that foreign investors also come with western technologies, and their management techniques which help in increasing competition within the domestic market. This benefits local consumers because they are able to get high quality goods, at a lower cost. This also increases the speed of modernization, and an access to the international market. This is because these companies are usually export-import oriented. On this basis, the integration of foreign direct investment with the labor force of the domestic country has an effect of creating a positive development of an economy of a country1. Globalization is a factor in the emergence of this international trade, and more so after the disintegration of the Soviet Union. This is because the Soviet Union was a country that was advocating for communalism. On this note, all countries under its influence had a closed economy. However, after its disintegration, majority of the nations within the world began to create an export promotion policy. They began to open their market system for purposes of promoting free trade. In developing these policies, developing countries of the world took an example of the Asian tiger economies compromising of Taiwan, Singapore, South Korea and Hong Kong. These countries managed to improve their economies because of insisting on exports, instead of imports. This policy involved the removal of trade barriers, and encouraging direct foreign investments. On this basis, local companies within the country will participate in international trade by associating with these multi-national companies2. This export promotion strategy was successful in developing countries, and China began to experiment with it in the periods of 1970s. It is important to denote that China had one of the closest economies of the world, prior to the 1970s. The various regimes in the country regulated its economy, and they never encouraged any direct investments within the country. On this basis, their market system was closed. This made the country to be very poor, contributing to its low economic development. However, after opening up its market system to foreign companies, China was able to attract a large percentage of foreign investments and capital3. In 1990s, the country became the second largest nation to host foreign direct investments after United States of America. This is because of its larger population, which could provide market for multi-national companies. However, the inflow of foreign investments is not the only factor that led to the development of the Chinese economy. One important factor to put under consideration is the creation of special economic zones by the Chinese government to facilitate trade. It is at these economic zones, companies were able to produce goods and services at an affordable cost, as compared to other regions of China. This concept is referred to as comparative advantage. This paper analyzes how the opening up of the Chinese market system, contributed to the development of its economy. This paper focuses on the special economic zones of China, and why it is cost effective to produce goods and services in these zones. The Market System, Comparative Advantage and Special Economic Zones in China: Before the 1970s, China had a regulated market system. According to this system, the government controlled all sectors of production and supply of goods and services. This also includes setting of prices of these commodities. Through this system, the Chinese government had institutions whose responsibility was to develop policies that would identify how to distribute the products, to whom the government should distribute the products, and at what prices. This closed market system made the China to be poor, and in 1970s, China began to open up its economy. The main aim of this was to attract foreign investments, so that they could bring in capital products such as money and technology, for purposes of increasing the GDP of the country, and improving its economy4. To effectively attract foreign capital, China created the special economic zones. It is in these zones that the government enacted policies such as tax reduction in order for companies to produce their products at an affordable price, therefore giving them a competitive edge over their competitors. A concept referred to as comparative advantage. The main purpose of these zones is to produce cheap but high quality Chinese products for exportation. By producing these products at an affordable cost, then selling them off at a cheaper price, then the company producing the products will manage to make profits. This in turn will result to the development of the Chinese economy. Take for example the Shanghai Pudong new zone which was created in 19925. This economic zone has made a great contribution in the development the economy of Yangtze Valley of China. Because of its open market system, and liberalization of trade, the state allows foreign business men to invest in tertiary industries, and run financial organizations. This zone has a stock exchange, with foreign banks directly involved in it. As a result of these policies, the Shanghai Pudong zone is responsible for 40% of the cities industrial production and outputs6. Foreign investors also came with technology, which is an important factor that determines the growth of an economy. Technology drives the economy in the sense that it enables efficient production of goods and services at a cheaper cost. Because of the affordability of their products, the company producing the goods will manage to acquire the target market. This in turn will lead to the growth of the nation’s economy, because the profits gained will be ploughed back into the economy leading to job creation, and higher tax income for the state. This is a factor that has led to the growth of the Chinese economy7. In acknowledging the importance of these economic zones, the Chinese government since 1992 creates 15 additional economic zones at a various capital cities of the nation8. These zones served as economic centers because they facilitated the importation of technology, and its subsequent exportation, mainly reflected on the goods produced at a cheaper cost. Another reason for the growth of the Chinese economy emanates from the proceeds that come as a result of the importation of its technology. China manages to trade with other countries of the world, and in the process of trading, China copies their technology. For instance, the Japan accused China of copying its high speed rail technology, and exporting the technology. This transfer of technological knowledge between China and Japan occurred because of trade between Japan and China. his trade was only possible because of the opening up of the Chinese market system, to Japanese investors9. The use of these technologies by the Chinese government and the special economic zones created by China has also led to the growth of the Chinese economy10. This is because investors are able to invest in these economies, taking advantage of low taxation to produce goods at a cheaper cost. Conclusion: In conclusion, the special economic zones are located on the mainland area of China. The government of people republic of China allows these areas to have a free market economy and this is reflected on the flexible government measures and economic policies that the government of China pursues. The economic management system in these locations does not exist in other areas of the Chinese mainland. These zones are in the Shantou region, Shenzhen, Zhuhai, Xiamen and the entire island of the Hainan province. This paper denotes that companies operating in these zones enjoy some special tax reliefs, and are highly dependent on international trade. Dependence on international trade is a key tenet of an open market system. International trade results to an influx of foreign capital. This in turn results to an increase in the GDP of a nation. Under these special economic zones, the prices of commodities are strictly driven by the forces of demand and supply. The government does not interfere with the pricing of the commodities that business organizations within these zones establish. The prices of the commodities are dependent upon the production cost of the products. On this basis, lower production cost, results to affordable prices of the commodities. This is an aspect of comparative advantage. Bibliography: Einchengreen, Barry, Yeongseop Rhee, and Hui Tong. 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