The Economic Development of China - Coursework Example

 Economic development of China CONTENTS Part One page no. Introduction……………………………………………………………………….3 Economic conditions……………………………………………………………..3 Population…………..……………………………………………………………10 Agricultural sector………………………………………………………………..12 Industrial sector…….…………………………………………………………….13 Economic Development…………………………………………………………..14 Conclusion………………………………………………………………………..15 Part Two Issues facing the nation………………………………………………………….16 Alternative solutions……………….…………………………………………….19 Best alternative/choice and reason for recommendation…………………………20 Steps to be taken in order to implement this choice………………..…………….21 References………………………………………………………………………..22 Part I: Introduction: China has been considered as one of the oldest civilizations in human history. The contribution to the invention of writing is also one of the major achievements of the Chinese civilization. The People’s Republic of China is the largest nation in Asia and the fourth largest country in the world. China is located in Eastern Asia between North Korea and Vietnam. It is bounded by Korea Bay, South China Sea, East China Sea and the Yellow Sea. It has diverse type of climate-tropical in south and sub-arctic in north. Most of the China lies within the temperate zone (CIA World Factbook, 2009). Economic conditions Although China has lost one fifth of its agricultural land due to environmental degradation and economics development since 1957, still the government has taken initiative to rectify these damages through reforestation and other methods. Focusing into the economic conditions of the country, we notice that real gross domestic product (GDP) from 1979 to 1999 was growing at an average annual rate of 9.7 percent, (China- Overview of Economy, n.d.) leading China as one the speedy growing economies. China’s rapid development has helped 200 millions people to come out of the poverty according to the World Bank Report. The first of economic reform of China commenced in 1978 which comprised of reform in agricultural production system in rural areas mainly the farmers were permitted to sell off their crops in the free market which attracted foreign investment, boost exports and high technology products were being imported into the country. It is the country with highest population in the world accounting for 21% of the world’s total population (Phillips, 2000). The average population density has been accounted as 134 per sq km in the year 2002, but the distribution of the population throughout China is unequal. Meanwhile the government had set up four special economic zones (SEZ) to encourage exports as well as imports. The reforms had a promising impact on the Chinese economy. Gradually price controls had been eliminated by the government over a wide range of products. The consequences lead to doubling of agricultural output and industrial gains in the year 1980s. The Chinese government faced various difficulties while carrying out these reforms like it has struggled to collect revenues, tried to eradicate crime and corruption and also maintained daily activities of the giant state-owned companies. By 1999 China achieved the rank of second largest economy in the world after USA although the GDP per capita was much less than that of USA. One of the major sources of China’s capital growth is Foreign Direct Investment (FDI). USA being the third largest investor in China accounts for 8.0 percent (US$24.6 billion) of total FDI in China from 1979 to 1999 (‘China: Overview of Economy’, n.d.). Some inflationary pressures have been experienced by China in 2004, due to excess investment in some sectors, speculation in real estate and increment in cost of production. The government took the policy of upbringing interest rates and adopted certain methods to cut down the investment in those sectors. According to 2008 estimation the inflation rate was 6% (CIA World Factbook, 2009). The Chinese economy has shown better performance during the post-reform period than pre- reform period (see Table 1). In January 2006, major revisions were made to its GDP data for 1993-2004 which indicated significant rise in the size of China’s economy and its GDP growth. The actual size of the economy in 2004 was nearly 17% higher than the estimated size (Morrison, 2006) Table 1. China’s Average Annual Real GDP Growth Rates, 1960-2005 Time period Average annual % growth 1960-1978 (pre-reform) 1979-2005 (post-reform) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (estimate) 5.3 9.7 3.8 9.3 14.2 14.0 13.1 10.9 10.0 9.3 7.8 7.6 8.4 8.3 9.1 10.0 10.1 9.8 Source: Official Chinese government data. (Morrison, 2006, p.3) With the advent of economic growth two remarkable changes have been observed in Chinese economy-one is the large scale capital investment and the other is the high productivity. Economic reforms have enhanced economic efficiency which has lead to increase in output and also motivated higher savings and investment in the economy. These reforms have lead to substantial growth in household savings. Thus savings in China has shown steady rise and it reached 49% by 2004 (Morrison, 2006, p. 3). The productivity gains have been the result of effectual allocation of resources in those sectors which are in control of the central government like agriculture, trade and services. As prices for many goods and services are significantly lower in China than that of other developed countries (while prices in Japan are higher), the Purchasing Power Parity (PPP) exchange rate raises the approximate size of Chinese economy from $1.9 trillion (nominal dollars) to $8.1 trillion (PPP dollars) (Morrison, 2006, p. 4). The PPP figures indicate that while the size of China’s economy is considerable, its standard of living fall below the G-7 countries. Thus, even if China would be able to overtake United States in the context of GDP still its standard of living would be less compared to the United States. (See Table 2) Table 2. Comparisons of United States, Japanese, and Chinese GDP and Per Capita GDP in Nominal U.S. Dollars and PPP, 2005 Country Nominal GDP ($ billions) GDP in PPP ($ billions) Nominal Per Capita GDP Per Capita GDP in PPP United States 12,473 12,473 42,180 42,180 Japan 4,605 4,021 36,150 31,560 China 1,912 8,116 1,460 6,210 Source: Economist Intelligence Unit Data Services. 2005 data are estimates. (Morrison, 2006, p.5) Chinese trade has been vastly influenced by FDI. Annual FDI in China has shown significant improvement which increased from $636 million in 1983 to $61 billion in 2004 (Morrison, 2006,p.5).Economists are analyzing that FDI will continue to pour in if the investments barriers are removed or lessened and hence it will also lead to rise in imports as well. USA is the second-largest investor in China, accounting for 8.5% ($48.0 billion) of total FDI, succeeded by Japan ($46.8 billion), Taiwan ($39.6 billion), and the British Virgin Islands ($36.9 billion) and South Korea ($25.9 billion) (Morrison, 2006,p.5).(See Table 3). Table 3. Major Foreign Investors in China: 1979-2004 ($ billions and % of total) Country Cumulative Utilized FDI: 1979-2004 Utilized FDI in 2004 Amount ($ billions) % of Total Amount ($ billions) % of Total Total 563.8 100.0 64.0 100.0 Hong Kong 241.6 42.9 19.0 29.7 United States 48.0 8.5 3.9 6.1 Japan 46.8 8.3 5.5 8.6 Taiwan 39.6 7.0 3.1 4.8 British Virgin Islands 36.9 6.5 6.7 10.5 South Korea 25.9 4.6 6.2 9.7 Source: Chinese government statistics, according to cumulative FDI from 1979 to 2004. (Morrison, 2006, p.7) The accruement of foreign exchange reserves by China has been very critical over the past few years. China’s total reserves reached $769 billion at the end of September 2005 compared to $29.6 billion in 1990 (See Fig. 1.) Source: China’s Economic Conditions (Morrison, 2006, p7) Abundance of cheap labour, labour intensive techniques and low cost of production has made China globally competitive. A large share of China’s imports comprises of raw materials and machinery goods which is used for producing manufactured goods. China has imported parts such as boilers, machinery, crude oil, organic chemicals, electrical machinery, etc and exported electrical machinery parts, apparel, furniture, etc. in the year 2004. China’s rise in terms of economic power has challenged trading system of many economies. It has encouraged incomes and low cost of variety of goods has led to an increase in purchasing power of the consumers. Population Now coming to population we observe that China has received aid from US for improving its population census in early 1990s.The exponential growth rate of population has increased from 0.0193 to 0.0120 since 1980s.The rate of population growth is being expressed as increase in 1000 persons per year which is given by the difference between birth rate and death rate. According to the Statistical Yearbook of China, 2003, death rates has shown steady decline from 1950s to 1970s reaching to 6.25 per 1000 in 1978. This implies that health and hygiene has tremendously improved (Chow, 2007, pp 195). 92% of the population is represented by 55 minority ethnic groups. With a population of 33,936, the Achang ethnic group is located mostly in the regions of Luxi, Longchuan areas. The introduction of higher educational system happened during the colonial rule in China. It comprises of 6 years of elementary school, 3 years of middle school, 3 years of high school, and 4 years of university. The Statistical Yearbook of China, 1990 has reported unusual low birth and death rates from 1958 to 1961 which has been the consequence of Great Leap Forward (famine that killed approximately 30 million people) which started in 1958.China has been able to reduce its death rate from 17 per 1000 in 1952 to 6.41 per 1000 in 2002 but the birth rate has also declined from 37 per 1000 to 12.86 per 1000.As a result, the natural rate of population has also declined from 20 per 1000 to 6.45 per 1000 (Chow, 2007, pp 198). Population policy has been taken by the state in 1971 which consisted of late marriages, having small family and long duration between births. China in terms of population density is less densely populated region compared to other countries. It has more cultivable cropland per capita compared to other nations. In context of exports and imports, China is one of the leading exporters of food products. There has been an argument that a larger population is essential for a country’s path towards economic growth. One factor that may lead to decline in birth rate is the providence of social insurance benefit to the large group of people especially the old-aged people because the Chinese people want to have more children for security and support in their old age. If insurance benefit is provided to every person then the birth rate is likely to decline. Agricultural sector Emphasizing on agricultural sector we can say that China have been one of the largest producers of staple food. Population increase has led to rise in the growing demands of the agricultural production. New policies and regulations have been implemented to bring about positive changes in the agricultural output which includes abolition of taxes, implementing new technology. Figure 2 shows the output produced by Chinese farms since 2000.China has been considered as the world’s largest producer of food grains. A tremendous increase in output of fruit has been noticed which is 160%.other crops which marked significant increase in production are cotton, oil bearing crops and sugarcane (Allen, 2007). Figure 2. (Allen, 2007 A Look at Today’s Agricultural Sector in China) China’s milk production has also shown drastic change since 2000. It is predicted that there will be 19% growth in its dairy industry on an annual basis in China between 2007 and 2011 (Allen, 2007). New technology has been a desirable aspect in order to increase the efficiency in the agricultural sector. Industrial sector China’s industrial sector is clinging on the country’s coal resources. This sector accounts for over 70% of the world’s total energy consumed which provides cement and steel for the production of roads, bridges, houses, and other buildings. Over the past 20 years, 4-5% of energy consumption annually in an average has been noticed in China (Price, Worrell and Sinton, n.d.). Today it has been found that the government control over the economy has been weakened and privatization of the enterprises are coming up. As there has been lack of natural resources, there is high chance of excess demand and shortage of supply. Hence, safeguarding of country’s natural resources is the main concern to balance sustainable economic development. A new path is being introduced to improve the efficiency of the industrial sector in a number of countries which is known as Voluntary Agreements. This agreement has long term outlook over a period of 5 to 10 years so as to have strategic implementation and investments. As in 2008, 49.2% of China's GDP was constituted by industrial sector. (CIA World Factbook, 2009) China is the third largest producer in the industrial sector. It produces iron and steel, chemical fertilizers, cement, automobiles, locomotives, coal, aircrafts, consumer goods, etc. Economic Development Coming into the economic development of the country a question arises whether the political climate conducive to economic development. We find that post 1949; the economy of china has been subjected to political turmoil. The political ideologies were given much importance rather than the economic development when left wing was in power. Chinese economy remained a close economy and savings were encouraged to increase growth by cutting down consumption and investing them into industrial sector. When right wing was in power, reverse happened. Economic development was given priority and agriculture sector was given much importance and population was also checked. During 1953-1960 it was found that economic growth was rapid to mobilization of savings and investment but Great Leap forward in 1958 made the whole country suffer from political intensification especially the industrial and agricultural sector. During 1961-1976, the political intervention has taken a backseat which helped the entrepreneurs to take individual decisions. The agriculture sector has adopted modern and advanced methods and also China has opened up its trade. Post 1977, the country has regained stability by adopting certain measures. It planned to import industrial equipment but due to adequate fund the plan remained unrealistic. The year 1988 has seen the high inflation of 18.5% (Minami and Jiang, 1994, p.vii). After the death of former party general Hu Yaobang in May 1989 brought about revolutionary movement for the demand for democracy but it has been suppressed by the authorities of China who used bullets on the students and residents. This had an adverse impact on the economy which leads to deterioration in China’s exports and FDI. After 1990 China is having steady growth rate. The economic growth rate of China is high and its GDP is large but it is less than most of the Asian countries. Conclusion According to many economists financial reforms have long term effect on economic development in China affecting markets and the financial intermediaries. Financial sector has contribution over technological innovation and in accumulation of capital. Banks has been the administrative units which facilitates the working conditions of the central government. It is the central government which exercises control over the financial sector. Opening up of markets and inviting Foreign Direct Investments have practically paced the nation now at an advantageous position and it has great potential to become the emerging economy with the highest economic growth, surpassing its neighbors, India, Pakistan and Nepal. Part II: Analysis Issues facing the nation This section analyzes the economic development of the country, its problems, the way out and its pros and cons of each of the solutions. China is one of the fast-paced economies in the world having GDP of 10% from 1979 to 2008 on an average (Morrison, 2009). However the current global crisis has vigorously affected China and GDP growth rate have slowed down. Millions of workers have lost their jobs which is a great concern to the government of China. Trade and investment played a greater role in shaping up the economy. In 2008 the value of merchandise trade got doubled which is definitely an exceptional performance but due to this economic crisis the volume of trade has fallen and also sharp decline in FDI flows has been observed. The major issues which are posing threat to China during the course of economic development are:- The global financial crisis has lead to economic slowdown due to decrease in foreign trade and investment and it would provide an obstacle to future growth prospects of the economy. Decrease in exports has been noticed for the first time in many years because of the current economic condition. Currently it is $1.465 trillion f.o.b. in the year 2008 (CIA World Factbook, 2009.). Hence consumption of domestic goods is encouraged by the government to lessen dependency on the foreign exports. The present scenario has turned out to be a major issue and millions of people are laid-off from their jobs. The present unemployment rate in 2008 is 4% officially in urban areas excluding migrants (CIA World Factbook, 2009). Thus the from the point of view of a citizen of China the government should take up certain initiatives or organize programs for the jobless people or provide them with basic amenities who are Below Poverty Line (BPL). In order to overcome the crisis to some extent the state should contemplate more on the capitalistic ideas. The State owned enterprises (SOEs) are putting great burden on the Chinese economy. The SOEs are subsidized by the SOBs. Government has supported many SOEs which are unprofitable thus leading to misallocation of funds and resources. It fears to reduce trade barriers as this may lead to defalcation of many SOEs and unemployment. The private sector has surpassed public sector and producing more than 50% of the total GDP. 98% of Small and Medium sized enterprises (SMEs) comes under non-public sector and they have limited access to credit due to lack of collateral, thus in order to expand their business financing is very much needed (Xiang, n.d.). As banks provide short term loans, the SMEs mostly depend on informal market for long term finance. To cover up the gaps in the market, a credit guarantee program should be launched to ensure lending adequate funds to specific sectors so as to reduce risks associated with these sectors. Therefore, both formal and informal sector should exist in order to build efficient financial system and to allocate the finance in a proper manner. In the Chinese economy a liberalized financial system is needed to channel the resources in optimum manner to those areas where the control of government over the prices is fragile. Also the funds should be optimally allocated. Liberalization of the interest rates is an indispensable way to improve pricing risk capabilities in China’s financial system. Role of ‘credit- rating agencies’ needs to be fortified. On the whole financial reform has a positive impact on the economic development of the country. The present policies are likely to serve economic development and the country is at new crossroads. 10% of the country’s GDP is damaged every year due to growing pollution (Morrison, 2006, p-21). Air pollution causing acid rain, water pollution from untreated wastes, desertification, and deforestation has resulted in loss of one-fifth of agricultural land (CIA World Factbook, 2009). The government of China itself sometimes does not comply with the environmental laws thus leading to serious environmental damage. This environmental damage is proving expensive for the country. Inflexible currency policy has made the country over-dependent on the exports and fixed investment and credit policies by the banks may lead to over-production in various sectors and inflation. Many analysts assert that despite economic growth in China, its currency policy has a negative impact on the economy as a whole. It is leading imports to be more expensive and exports to be cheaper. They suggested having a floating exchange rate regime in order to have a sustainable economic development. Inefficient banking system is prevalent in China which is due to corruption and misallocation of savings. The banking system is corrupted as loanable funds are offered to those people having political backup. There is lack of rules and regulations in China because of corruption, speculation. Many economies feel hesitant to trade with China as the contracts and agreements are not lucid. This restricts competition and allocation of goods in an efficient manner. As a result business is hampered. Income inequality has serious effect on the public in general. Mostly the rural people are deprived and there is lack of health care, educational facility and security to these rural poor. There have been number of protests and they have misperceptions regarding the economic reforms undertaken for benefiting the rich. Protests have been made on the context of land seizure and shut down of plants. Due to poor government regulations, unsafe consumer goods are sold in China and exported abroad. Hence it is posing threat to health care and therefore exports have been reduced. Many firms guided by profit maximization theory want to maximize their profits through unfair means (Morrison, 2006). Alternative solutions Thus the government should take initiative to wipe out these above issues by taking up certain measures like protecting environment, reducing corruption, efficiently utilizing the resources and channel them in proper direction, improving the standard of living of the people staying in the rural areas and also providing them insurance benefits and promoting balanced growth in all sectors. Financial system should be compatible with the institutions and preventive measures should be undertaken in order to reduce the panic. Moral hazard problem persists if the financial institutions are provided over protection. Risky projects should be financed and capital market needs to be developed and more organized. Fixed interest rate system proves to be risky although it reduces the risk that occurs during exchange rate fluctuation. Enterprise reform should be put forward in order to prevent misallocation of investment funds and resources. It can be suggested that ownership of the firms should be separated from the management control of the government, distributing ownership among various public sector enterprises and enhancing competition among the firms. Government should make significant efforts in protecting the environment. Air and water pollution needs to be controlled in order to have healthy atmosphere. The elders having lung and heart problems and the ill should avoid going outdoors and energetic activities to avoid pollution. As opposed to the fixed exchange rate policy of China, the suggestive measure should be to have an independent interest rate policy to stabilize economic growth and have low inflation. Expansionary monetary policy can be adopted to encourage the banks to function in a proper and smooth manner. A flexible exchange rate would counterbalance the domestic demand in response to internal and external shocks. In order to have efficient banking system, the state enterprises needs to be subsidized by the state owned banks but market- clearing interest rate cannot be charged to them, thus the state enterprises as well as state banks need to be implemented simultaneously. Enhancing profit incentives would lead to mobilization of savings and encourage investment. Legal policy measures are required to be issued to improve the standard of implementing the laws in order to eradicate corruption and speculation. From 1995 to 2002, income inequality has remained constant throughout. Inequality in income distribution should have to be minimized and the poor especially the rural poor should be taken care of and be provided with proper food, sanitation, health and basic educational system. Best alternative/choice and reasons for implementation The best alternative measure to solve the issues relating to economic development should have to be less government intervention in the economy and to foster trade and development so as to maintain stable economic growth of the country. The merging nations like China and India have gained a lot form globalisation mainly in terms of economic growth and employment scenario. Encouraging foreign direct investment is still a strong light of hope for the future sustainability of these economies. China has reached a stage where goods made here are popularized even in United States and other countries owing to their cheap price and variety. Labor is cheap in China especially in the manufacturing sector. Hence the developed nations would always be eager to make the most of it. Steps to be taken in order to implement this choice In order to implement these solutions one need to have rule of law and strong macroeconomic policies to bring about changes in the economy. The government should opt for contractionary monetary policy in order to prevent inflationary imperativeness in the economy and it should improve its fiscal policies so as to avoid running from deficit. References: 1. Allen, 2007 A Look at Today’s Agricultural Sector in China 2. “Arguments-Trends”, 1999, IIASA, available at: http://www.iiasa.ac.at/Research/LUC/ChinaFood/argu/trends/trend_10.htm (Accessed on June 3, 2009) 3. Bergsten, C, Freeman, C, Lardy, N, Mitchell, D, 2008 China's Rise: Challenges and Opportunities, Peterson Institute, US 4. 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