The Changes in China's Economic Development Strategies from Planning to the Current Socialist Market System - Essay Example

China’s Economic Development Strategies China’s Economic Development Strategies Introduction Economic reforms in China began in 1978 with the focus of shifting towards a market oriented-economy and have since then displayed exceptional dynamism and complexity, largely emerging as successful (Naughton 2007, p. 3). Inadvertently, negative lessons abound along the journey towards China’s economic reforms, but there are many positive policies that contributed towards the successes of the strategies that were employed. Prior to the 19th century, China’s economy was among the most advanced and largest in the world, then stagnated and even declined in most of the 20th century, albeit in absolute terms, and briefly recovered before WWII. The economic reforms that introduced market principles were initiated in 1978 and implemented in two phases; the first in the early 1980s and the second in late 1980s and early 1990s (Chow 2004, p. 128). Generally, the reforms were designed to realize economic growth by actively introducing technology and foreign capital while at the same time remaining committed to socialism, hence the socialist market system. The socialist market system is based on the state-owned sector’s dominance alongside the open-market economy, which was introduced in China under the reign of Deng Xiaoping. This paper will explain the changes that China’s economic development strategies underwent from planning to the current socialist market system. Overview China’s past economic institutions were irregular and unique among its developing peers (Smil 2003, p. 8). This was mainly because the socialist institutions were not the most suitable for the poor and mostly rural economy. Essentially, it meant that socialist institutions worked both beneficially and detrimentally, on the extreme ends, among different populations in the country (Chow 2002, p. 39). The economy the new Communist leaders inherited in China has gone through Maoist radicalism, socialism, revolution and economic reform and growth throughout the years from 1949. However, although the government had brought about stability despite its recent history of civil war and poverty, it brought suffering to its people through the famine of the 1958-1961 Great Leap Forward and the Cultural Revolution (Naughton 2007, p. 3). After that period, Xiaoping was ready to give market-oriented economic growth methods consideration in order to find a system that would be compatible with the conditions specific to the country, facilitating revitalisation. Then, with the start of the1978 economic reform, most of the ideologies of socialism were gotten rid of and the country started on a journey to ease social conditions and improve stability. The policy shift was mainly prompted and informed by the recognition and acknowledgement that China’s ordinary people’s incomes were much lower than those of other Asian economies (Svejnar 2008, p. 69). Subsequently, areas of foreign investment were established by the government. They included, categorised into zones, special economic; high-tech industry development; open coastal cities; open border cities; technology and economic development; the open peninsula; and open delta (Wong & Christine 2008, p. 183). These zones, forming the larger part of the first phase of the reforms, triggered substantial inflow of foreign investment. The most noticeable investors were companies from Taiwan and Hong Kong. Essentially, in the true market socialism model, the means of production, or the assets, were socially owned by the communist state, which simultaneously mimicked the competitive market economy’s supply and demand methods of price adjustment (Perkins 2008, p. 93). The Need for Reforms This open-door economic strategy brought into the country not only foreign technology and capital, but also management knowhow that assisted in transforming the vast space and labour resources into rapid and sustainable economic growth in the early 1980s (Shengkui 2002, p. 41). However, on a negative note, the 1989 Tiananmen Square incident led to the stagnation of the economy, but the country was already recovering in the early 1990s. The recovery and growth was so phenomenal that the per capita income had increased 14 times from what it was in 1980 to $770 in 1998. The figures might not represent much on their own, but the magnitude of growth cannot be ignored because ideally, Xiaoping had achieved his first goal of improving China’s economic status (Brandt & Rawski 2008, p. 102). The growing national incomes and economic development were the reform’s positive consequences, especially those realised through the open-door policy. However, conflicts started emerging and they were linked closely to the standards of living of China’s people. First of all, disparities started arising in terms of income levels, widening the gap that already existed between the rich and the poor to dangerous extremes (Lau, Qian & Roland 2000, p. 104). Previously, the disparities still existed under the purely socialist economy and were characterised by poor standards of living, but the rich-poor gap was not anything exceptional. During the initial stages of the transition, reformers had pointed out needs that were not met in most areas of the economy. Those that were unmet were due to the country’s poverty, underdevelopment and the wastefulness of the command economy (Naughton 2007, p. 87). But the open-door policy widened the gap between rural areas and cities as well as inland and coastal regions (Wong & Christine 2008, p. 186). As a result of encouraging entrepreneurial activity in the country, there was an influx of individual enterprises, private enterprises and foreign-owned companies in addition to the township and state-owned enterprises. Under the new structures of ownership, the employees of the newly enterprises were paid better than their counterparts employed by the townships or state-owned enterprises. The remuneration disparities were mirrored in the increasing gap in income between the executives, directors, and owners of such enterprises and the state-owned enterprises’ employees (Wong & Christine 2008, p. 189). China was rapidly improving its people’s living standards and achieving economic development, but there was uncertainty regarding the state’s direction and its people under its one-party dictatorship, with claims that the revolution was not complete yet. The bureaucracy of the country’s systems and organizations was falling out of sync with the needs of the contemporary world, and banks and state-owned enterprises were picking the same example of falling behind standards of global management skills and technology (Brandt & Rawski 2008, p. 93). Inevitably, the reform of the organizations became a priority in order for China to transform into a modern superpower. The country needed a just society that would guarantee by law the existence of individuals and companies as well as streamlined administrative organizations. The Changes The command economy had been blamed for lavishing costly industrial projects with resources at the expense of the basic and ready-to-satisfy needs of the consumers (Naughton 2007, p. 87). Therefore, the reformers sanctioned policies that allowed organisations and individuals to satisfy their unmet needs and earn extra income. Although that initiative was primarily experimental, it was also sanctioned that if the command economy would be eroded by the processes and compel the authorities to exempt the organisations and individuals from its rule, it would still be adopted (Wong & Christine 2008, p. 214). The lowering of barriers led to the opening up of the systems, and organisations and individuals were afforded the opportunity for entrepreneurial activities geared towards meeting market demands. The reforms gave rise to both lightly taxed and unregulated economic activities because of their orientation towards developmental objectives. For instance, village and township enterprises were strategically placed outside the plan and under rural communities, the essence of which was the potential to contribute economic growth through local investment (Naughton 2007, p. 87). In the specially created economic zones as mentioned earlier, foreign-owned businesses operated freely. This was aimed at encouraging more of their counterparts to invest in China, especially in terms of technology. Without threatening the government’s ability in terms of administration of the economy, these policies contributed to the growth of the economy by loosening control over resource, the result of which was growing competition. It followed, therefore, that the second phase of changes would begin in the late 1990s and focus on the compulsory plan being dissolved and one with uniform tax rates and rules created for all the sectors in the economy (Naughton 2007, p. 88). This saw the phasing out of the market system and dual-track plan and instead unifying prices at market prices. Through these reforms a virtuous cycle was created enabling numerous minor reforms to culminate into massive institutional changes. As competition was expanded and financial pressure increased, more participants were motivated into innovation. Consequentially, these reforms pushed the country further into a full market system in various ways. First, market forces, primarily, started to govern market products. The key alterations of relative prices virtually disappeared, such as the under-pricing of industrial materials and energy (Lau, Qian & Roland 2000, p. 122). It was observed that even in state-enterprise dominated sectors, prices, sales and profits responded beyond the national to global market trends. Second, the allocation of services that were exclusively the province of state enterprises or systems run by state officials was extensively commercialised. Examples of services that became increasingly available vial networks that operated parallel to the market-based suppliers included housing, legal services, education, insurance, health care, entertainment and telecommunications, which were all accessible to whoever could pay (Lau, Qian & Roland 2000, p. 120). Then the labour markets started expanding rapidly in the last two years of the century, characterised by uncontrolled migrations into urban centres and employees of state enterprises being laid off. In the reforms’ first phase, decentralization was motivated by the need to bring incentives and markets into the system. But the second phase had more clearly divided managerial responsibilities between local and centre. This was in a manner designed to centralize the balance in terms of the exclusive authority over resources (Naughton 2007, p. 101). The second phase also required that the central government strengthens its macroeconomic management and regulatory roles by establishing reliable and sufficient financial revenue sources. Privatization was undertaken on a large scale and, apart from a small number of large monopolies, all state-owned enterprises were liquidated with private investors buying the assets. Effectively, state-owned enterprises had been reduced by 48 percent in three years from 2001 to 2004 (Perkins 2008, p. 53). Several significant factors can be associated with the success of the Chinese economic reforms. In the first place, there was the restructuring of the financial and banking sector, even though not to the standards reformers expected, but were given more serious considerations in the second phase. The initial perspective of the reformers with regards to the financial sector was to clean up the bad debts. Then, Zhu Rongji, who succeeded Xiaoping, initiated reforms that were aimed at separating politics and state banks, a policy designed to enable the Central Bank to assume more regulatory functions (Lau, Qian & Roland 2000, p. 130). Earlier, in 1994, the government had divided the banking system into three categories with the private banks allowed increased, albeit limited, roles. The three categories included cooperative banks, policy banks and commercial banks, although the country’s four major banks were retained under state authority and handed greater loan making capacities on commercial basis. Because the banks were the key sources of finance, capital markets were forced to remain small prior to the 1998 Asian Financial Crisis. However, the crisis provided the reformers with the best platform to advocate for the reform of the financial sector, with the first step being reorganising the People’s Bank of China’s branches along regional lines. This was aimed at shutting out political interference in decisions related to lending as was always done by authoritative party chiefs. At that moment, the separation of commercial banks and state-owned enterprises from the government was the most significant strategy and policy employed by the reformers. The supporting argument was that the future of China depended on the private and competitive organizations in services and industry. The reformers were open to the international trade community, welcoming direct investment from established traders from the United States, Taiwan and Hong Kong, and direct investments brought along innovations, business models and technology (Wong & Christine 2008, p. 142). Then, the economic reformers were realistic and ready to try and implement any strategy and policy that worked and, in the same way, abandoned those that proved obsolete or not working towards the interests of the reforms. In essence, that was one of the reasons of fashioning the second phase of the reforms. Their way of implementing the reforms, particularly the second phase even after the death of Xiaoping, ensured that all people and organizations were made better off while reducing the possibility of making others worse off. In this sense, their strategies minimized opposition and maximized support while preserving social harmony. The reformers foresaw a situation in which China would reach a developmental stage in need of truly competitive markets that can only be achieved by anti-monopoly policies (Perkins 2008, p. 92). Competition, even if fierce, was inevitable if the economic results were to change and be better than those that had been experienced under the central planning. The competitiveness of the markets, and consequently the efficiency, can be improved if the government eliminates information irregularity. According to the reformers, that is the only way the quality of services and goods can be assured, meaning that the government must set standards (Lau, Qian & Roland 2000, p. 111). It was up to the government to acknowledge that more market did not imply less government but, rather, different government. When testing agencies are authorised and supervised by the government, the notion of moral hazards can be reduced if leverages are reduced and instead require bonding. A significant way of sustaining the reforms into the future as proposed by the reformers is for the government to stop naturally arising markets that come into existence without government intervention. A practical example would be the establishment of a long-term bonds market with the backing of qualified and long-term residential mortgages, specifically the owner-occupied type (Perkins 2008, p. 196). Conclusion China’s economic reforms can largely be viewed as successful, with the key contributory factors being the introduction of the market economy, which was strategically planned to start from the rural areas and move into urban cities (Perkins 2008, p. 182). In the entire reform process and cycle, there were three prioritised objectives which included reforming state-owned enterprises, administrative organizations and the financial system. Even after the reforms, the system of socialist planning is still operational, however, in infrastructure and factor markets such as capital, labour and land. These inputs are significant because their pricing is used in the provision of indirect subsidies to domestic exporters and foreign investors. For example, provinces reserve the authority to value and price land at any price to any interested buyers (Brandt & Rawski 2008, p. 119). Where individuals and organizations can legally work is determined by the labour responsibility system. However, the banking system is among the sectors that have seen the least reforms in the sense that they were still largely under government control even after the better part of the reforms. The basis for deciding loans is mainly national or provincial objectives as well as the variable cost of the loan or capital or, in other terms, the ability of the borrower to repay (Lau, Qian & Roland 2000, p. 112). In the same way, the supply and pricing of infrastructure, especially to enterprises that are foreign investments, is determined basing on national or provincial objectives and are also enterprise-specific. Further, although to a lesser extent, this is also applicable to state-owned enterprises’ outputs, which are subjected to the directions of their central departments. In its transitioning to socialist market system from the socialist planning system, China aligned itself with most nationalist market economies (Chow 2004, p. 139). References Brandt, L & Rawski, G 2008, Chinas great transformation, Cambridge University Press, Cambridge. Chow, G 2002, China’s economic transformation, Blackwell, Oxford. Chow, G 2004, ‘Economic reforms and growth in China’, Annals of Economics and Finance, vol. 5, no. 4, pp. 127-152 Lau, L, Qian, Y & Roland, G 2000, ‘Reform without losers: an interpretation of China’s dual-track approach to transition’, Journal of Political Economy, vol. 108, no. 1, pp. 120-143. Naughton, B 2007, The Chinese economy: transitions and growth, MIT Press, Cambridge and London. Perkins, D 2008, Forecasting China’s growth to 2025, Cambridge University Press, Cambridge. Shengkui, C 2002, 2002 China natural resources report, Shangwu Yinshuguan, Beijing. Smil, V 2003, China’s past, China’s future: energy, food, environment, Routledge, London. Svejnar, J 2008, China in light of other transition economies, Cambridge University Press, Cambridge. Wong, P & Christine, W 2008, Chinas fiscal system: a work in progress, Cambridge University Press, Cambridge. Read More