Chinas Economic Development Since 1978 - Research Paper Example

China’s Economic Development Since 1978 Introduction Since 1978, China has experienced staggering economic growth that has positioned the country ona pace to become the world’s largest economy. Between 1978 and 2010, the country’s gross domestic product grew at an average annual rate of 9.5% a years (Meng 2011, p. 59). This essay examines the most important features of China’s economic development since 1978 and considers how they explain China’s rapid economic growth. Specifically, the research argues that China has achieved this growth through instituting market reforms and increasingly emphasizing privatization. Background Throughout the 20th century, China witnessed considerable political, cultural, and economic change. In the early parts of the 20th century, the country experienced, perhaps, its most startling change as over millennia of dynastic rule was overthrown and the People’s Republic of China instituted. Later in the century, Mao Zedong’s Communist forces would overthrow the Kuomintang forces (Lynch 1998, p. 101). Zedong would institute a total overhaul of the land ownership system and work towards instituting socialism. In working towards these goals Zedong implemented the Great Leap Forward, which sought to transform China from a country based on an agrarian economic structure to one of rapid industrialization and modernization (Lynch 1998, p. 101). To a large part, the Great Leap Forward is recognized as a great catastrophe and resulted in nearly 45 million deaths, as well as economic regression. This resulted in Zedong’s marginalization in the party, which then resulted in Zedong implementing the Cultural Revolution. Occurring between 1966-1976, the Cultural Revolution sought to enforce communist rule by removing capitalist and traditional culture elements from society, and to institute Maoist political rule (Lynch 1998, p. 132). While this movement reinstituted Mao Zedong to power, one again it resulted in large-scale economic failure. Following Zedong’s death in 1976, reform minded leader Deng Xiaoping gain prominence (Lynch 1998, p. 140). Since 1978, China has experienced an unprecedented period of economic development. Analysis After the death of Mao Zedong and the ascendency of Deng Xiaoping to power, China began instituting significant market reforms that would greatly contribute to economic growth. While the previous regimes had worked towards implementing a Soviet style socialist system, as Xiaoping assumed power the country began to move away from this structure. Agriculture had long been a focus on the previous communist policy changes so it is no surprise that upon assuming control Xiaoping worked to reframe Chinese agriculture in terms of market reforms (Huang 2001, p. 456). One of the major changes was the decollectivizing of agriculture and the emphasis of the Household-responsibility system (Huang 2001, p. 456). One considers that this system greatly mirrors the structure of Western economic structures. While previously land had been under control of the Communist party, the Household-responsibility system placed control of plots of land to individual citizens (Huang 2001, p. 456). Additionally, the farmers were able to retain their production from the plots of land after paying a general tax to the government. In aligning this system to Western market standards, China was able to achieve considerable economic progress. It’s noted that these changes increased farmer motivation towards production and as a result agricultural production greatly increased throughout the entire country (Huang 2001, p. 457). While China had experienced tremendous famine and poverty in past decades because of Communist agrarian policies, the effectiveness of this reform is perhaps most noticeable in the increasing access to food in rural areas throughout China. Fig. 1 below demonstrates the staggering rise in wheat production that has occurred in post-1978 China. Fig. 1 Production of Wheat 1961-2004 While market reforms implemented in rural contexts greatly contributed to China’s economic growth, Xiaoping also implemented market reforms in China’s urban areas. Prior to the institution of market reforms, state-owned enterprises were pegged to a quota system where production above the planned quota was prohibited for sale. The market reforms shifted these regulations allowing these industries to sell what they produced over the quota level (Benjamin 2008, p. 99). Another prominent shift that was implemented in this context was the sale price of goods. During the Maoist regime commodities were sold at state set prices (Benjamin 2008, p. 99). This plan had resulted in widespread inefficiency as it ran counter to stabilizing market forces (Benjamin 2008, p. 132). As a means of avoiding such practices, Xiaoping allowed goods to be sold for state prices, but also for prices in-line with market determined rates. This change resulted in much greater economic efficiency and prevented the shortages that had been a prominent aspect of the past (Benjamin 2008, p. 99). While the rural and urban market reforms constituted a perhaps more significantly in these early post-Mao reforms was the gradual permission of private industry. With the allowance of private industry, China’s economic makeup greatly shifted. Increasingly private industry came to dominate the economic landscape and make up a greater part of industrial production (Maddison 2007, p. 21). Additionally, this price flexibility made great contributions to the service sector. The move towards private industry was also recognized in the development of special economic zones. While much of the country remained prohibitive to foreign investment because of strict rules and regulations, the special economic zones constituted areas that permitted foreign direct investment (Maddison 2007, p. 21). Within these specific zones the economy would basically run under a capitalist economic structure. One recognizes that this shift towards privatization while immediately successful, also laid the groundwork for later economic growth. The foreign direct investment that flooded into these special economic zones would establish the light industry that would lead to the current trends of investment (Maddison 2007, p. 22). Throughout the 1980s, China continued to implement market reforms and allow increasing amounts of privatization. Progressively during this period the government began to loosen controls over private industry. While many industries remained under state control China was able to increasingly allow struggling industries to undergo privatization. Still, even more potent was the large-scale market-oriented structural shift that the government underwent. In these regards, the Chinese government increasingly became decentralized (Maddison 2007, p. 65). This allowed leaders of local provinces to institute their own changes that would promote economic growth in their individual regions. Fig. 2 demonstrates the shift in gross domestic that occurred between 1950-2003. Fig. 2 Chinese Gross Domestic Product 1950-2003 The chart demonstrates a staggering rise in the gross domestic product between 1980 and 2003. To a large extent this growth rate corresponds with the decentralization of the state economy. While undoubtedly other elements contributed to this growth rate, such dramatic changes attest to the recognition that the decentralization of the Chinese state greatly positively impacted economic growth. One recognizes that while the decentralization of the state economy had immediate impact in terms of economic growth, it has been considered to be detrimental to the Chinese economy in a variety of ways (Rawski 2008, p. 222). To a large part, the decentralization opened the door for an increasing amount of industry corruption, as the plethora of provinces operating under their own auspices greatly complicated effective regulatory patterns (Rawski 2008, p. 222). Additionally, the decentralization caused a significant amount of cultural and political strife. Notably, the increased corruption and inflation that emerged as a result of decentralization directly contributed to the Tiananmen Square protests (Rawski 2008, p. 222). While the increasing market reforms resulted in a modicum of cultural and political strife, they undeniably contribute to China’s economic growth. Despite the Tiananmen Square protests China continued to institute market reforms, as well as move towards increasing levels of privatization. In 1992 another significant move towards the affirmation of these values occurred as Xiaoping reopened the Shanghai Stock Exchange (Meng 2011, p. 40). The Shanghai Stock Exchange had been shut down during the period of Mao Zedong rule and its reopening increasingly opened China to foreign investment. These changes were followed by radical changes in terms of privatization. While during much of the 1980s state industry was the predominant mode of operation the 1990s witnessed nearly all industries transfer to private ownership. The remaining state-sponsored industries were large monopolies. This process further continued into the 2000s. It’s noted that, “Between 2001 and 2004, the number of state-owned enterprises decreased by 48 percent” (Meng 2011, p. 45). In addition to this privatization the government increasingly reduced regulations surrounding trade and tariffs. Of course the exact impact these reforms have had on economic development is impossible to determine, yet strong statistical evidence, as demonstrated in the staggering gross domestic product growth rate (Fig. 2) attests to the increasing impact of these reform measures. In the contemporary world, the shift to market principles and privatization has created a structure that allows China to compete aggressively in the global economy. Namely, China has created a situation where low taxation levels and regulations have greatly outpaced Western competitors. Wong (2011, p. 2) notes, “Conventional wisdom holds that nations woo multinationals by lowering taxation levels. This act, in turn, results in invidious fiscal competition—the race to the bottom (RTB) thesis.” Indeed, what Jensen refers to as the race to the bottom, is the theoretical understanding of fiscal policy competition wherein the host country that is able to offer the bottom level tax rate is the country that will receive the most foreign investment. Individuals such as Wong (2011, p. 10) have indicated that, “Tax exemption or tax holidays for FDI are used by 55% of developing countries but only 20% of OECD countries.” In this context of understanding, China has gained achieved a great deal of economic growth through lower taxation, seemingly as a means of off-setting political risks. One considers the extremely strong inflows of foreign direct investment into China as a primary example of these trends. Between 2000 and 2011 China’s inflow of foreign direct investment increased from $38 billion to $185 billion, rivaling that of the United States (Wong 2011, p. 10). While investing in China still carries with it risks of corruption, the oftentimes-lax regulatory environment has also been leveraged by organizations in economically efficient ways. In considering China’s economic growth in these regards, one considers that it fits directly into prominent theoretical models. The OLI paradigm, particularly locational advantages, is particularly apt in terms of these growth patterns (Wong 2011, p. 34). China’s economic structure and lax workplace regulations are such that it makes it provides Western based multinational corporations a competitive advantage to transfer manufacturing to the region. For instance, seminal United States computer and technology organization Apple, Inc. has outsourced much of its product manufacturing to China where cheap labor is so efficient that workers have to sign a pledge promising not to commit suicide. In this context of understanding, China becomes a primary product cycle component for Western corporations needing product assembly. When considered from the Chinese perspective Western investment in manufacturing has been one of the great contributing factors to the rapid economic growth that occurred after opening to the West. To an extent these patterns of foreign direct investment can be understood in terms of the Heckscher–Ohlin model. Influenced by economist David Ricardo’s theory of comparative advantage, the model examines foreign direct occurring as countries focus on what they are most efficient (Wong 2011, p. 36). Within the spectrum of China’s comparative advantage occurs as manufacturing production is implemented in these areas, while outflows of foreign investment are directed at high technology regions. Conclusion In conclusion, this essay has examined the features that have contributed most prominently to China’s economic growth since 1978. The essay has demonstrated that a number of reforms were implemented in the post-1978 period that directly contributed to the economic growth. While there were a myriad of reforms that were implemented, this research recognizes that in the post-1978 period China has increasingly moved increasingly towards privatization and a market economy. As such, change during this period is interpreted under these two broad ranging features. Within this spectrum of understanding, the essay has further linked specific reform measures to economic change. One of the foundational changes was the relinquishing of state control over land-ownership, as this increased farmer motivation and reduced famine. Another foundational change was the development of special economic zones that operated largely under capitalist regulations. This research has argued that these poles of reform – market oriented development and privatization – increasingly were developed throughout the 20th century. While during the first half of the 20th century China experienced tremendous change and irregularities, it was the commitment to free market principles that ultimately contributed to the post-1978 growth. References Benjamin, D. (2008). Chinas Great Transformation. Cambridge: Cambridge university press. Huang, J. (2001). Agriculture in China’s Development: Past Disappointments, Recent Successes, and Future Challenges. New York: Routledge. Lynch, M. (1998). People’s Republic of China 1949–90. Trafalgar Square Publishing. Maddison, A. (2007). Contours of the World Economy, 1–2030 AD. Essays in Macro- Economic History. London: Oxford University Press. Meng, F. (2011). Phenomenon of Chinese Culture at the Turn of the 21st century. Singapore: Silkroad Press. Rawski, G. (2008). Chinas Industrial Development. New York: Templeton Press. Wong, P.W. (2011). Chinas Fiscal system: a work in progress. Cambridge: Cambridge university press. Read More