The Effect of Economic Reforms in China and India - Coursework Example

Task The Effect of Economic Reforms in China and India: A Comparative Study I. Introduction A. The question to be answered Openness of the economy is usually associated with the adoption of certain economic reforms, facilitating trade liberalization and FDI inflow. The aim of this research will be to provide detailed comparative analysis of the effects the economic reforms (such as FDI openness, and trade liberalization) had on China and India (Wacziarg and Welch, 187). Introduction China and India are now some of the leading industrialized countries in the world. This was however not the case years back before the governments of both countries took an initial step to fast track economic growth and development within their countries. Both governments intervened into the economy to create more opportunities for investment from both foreign and domestic investors. In addition, these governments created an enabling economic framework that encouraged economic, and industrialization activities. Nowadays, China and India are some of the leading manufacturers in the world, with nearly half of the world’s manufactured programs coming from their industries. This is all thanks to the economic openness created by the governments in place in those two countries, , associated with the adoption of certain economic reforms that facilitate trade liberalization as well as inflow of FDI. As such, this research takes a comparative analysis of the effects of these economic reforms, especially trade liberalization and FDI, on the economies of China and India, the effect and impact of these reforms, as well as the benefits and challenges that accrued because of adopting these reforms. It takes a close look at how these countries performed economically before the inception of these reforms, as well as how they later improved or transformed after putting in place the above-mentioned reforms. In addition, it reviews the changes that these countries underwent before and after the institutionalization of basic economic reforms by their political leadership and governance structures. The Chinese Economic Reforms The government of the People’s Republic of China in 1978 spearheaded the Chinese economic reforms. The government dubbed these economic reforms as “Socialism with Chinese characteristics”. These reforms began in December 1978 under the pressure of particular reformists under the leadership of Deng Xiaoping within the Communist party of China. The fact that necessitated these reforms was the history of the Chinese economy, which sometimes back prior to the nineteenth century, was one of the largest, as well as the most advanced economies in the entire world. However, the national product per capital remained average in comparison to global terms. This economy did not grow as anticipated over the next decades, but instead stagnated from as early as the 16th century. This economic crisis worsened with a decline in absolute terms in the 19th century, coming all the way to some significant parts of the twentieth century. The Chinese economy had a brief recovery in the 1939s, but that is the best it could do as it was not able to recoup its loses and former glory as a leading economic giant. As mentioned earlier, China began putting in place economic reforms to spearhead its economic recovery in 1978, whereby it introduced market principles undertaken in two stages. The first stage of these economic reforms was in late 1970s going all the way to early 1980s. These reforms involved the decollectivization of agriculture, granting entrepreneurs permission to start businesses, as well as opening the country to allow foreign investors to come in and start investing. However, this first stage of economic and industrial reforms in China did not come along with the privatization of its industries as most of them remained under the ownership of the state. This to some way inhibited the growth of these industries in such a way that they could not take advantage of economic opportunities. The second stage of economic reforms in China started in the late 1980 going all the way to early 1990s. These reforms majorly centered on the privatization of state owned industries, as well as the contracting out of most duties in these industries. In addition, this second phase of reforms incorporated the lifting of protectionists’ policies, price controls, as well as regulations, a move that opened up the Chinese economy to external investors. However, the government still maintained state monopolies in critical sectors of the economy, such as the petroleum and banking sectors. This second phase of reforms brought about a significant growth in the private sector because of the openness and trade liberalization policies instituted with the openness and liberalization of the economy. As such, the private sector grew so remarkably that it now contributes a significant share of the Gross Domestic Product (GDP) of the country, standing at 70% as at 20005. The Chinese economy recorded unprecedented growth from the time it began putting up these economic reforms in 1978 all the way to 2013. The economy of the country also recorded a significant increase in growth of 9.5% on an annual basis. Furthermore, the Chinese economy developed so fast during this period that it surpassed that of Japan, one of the longest economic leaders of the Asian economy in 2010. As such, China became the largest economy in Asia and the second largest economy in the world after the United States. In fact, analysts argue that the China might easily topple the United States to become the world superpower in economic might and strength; this is going by the economic projections that suggest the Chinese economy would be the largest economy in the world by the year 2025. As such, the massive success in the economic policies in China, coupled by the manner and style of their implementation led to a great transformation and development of the Chinese society. Some of the major changes are because of large-scale government planning programs, which incorporate market characteristics. This has led to great transformation of the Chinese people, such as alleviating them from poverty. However, another effect of these reforms in an increase in comes of the Chinese people, as well as a subsequent increase in the income inequality gap. Much as there may be some demerits to the rampant improvement of the Chinese economy in relation to the economic reforms taken by the country, it is clear that most of these changes brought gains that are more positive for the country. The Indian Economic Reforms India is another economic giant that awoke from slumber just like its Chinese counterparts, and instituted strategic economic reforms that brought about massive transformations in the country’s economic settings. These reforms refer to the economic liberalizations of the country, which began in 1991. The government in place made changes to the economic policies of the country with a main goal of transforming the economy to be more market oriented, as well as expand the role of both private and foreign investments in the country. Just like the Chinese, the Indian government sought to open the economy to more investors by eliminating various barriers to trade through liberalization of the economy. This led to the high economic growth that the country recorded in the 1990s and 2000s after instituting these economic reforms that even its proponents credited the move. However, critics still oppose the reforms instituted by the government by putting blames on the reforms, such as the increase in poverty levels within the country, the high rates of income inequalities, as well as the rampant rise of economic degradation in the country. In a nutshell, the overall direction of liberalization in the country remains the same irrespective of the ruling party in office, and its economic policies that might be in contrary with those of its predecessors. However, there is no party on record to have political difficulties in changing issues related to economic liberalization, such as those concerning labour law, as well as those affecting the reduction of agricultural subsidies. As such, the country still has lively debates in relation to what still holds the economic reforms sustainable. Advisors to the Indian government coalitions advise it to continue its economic reforms and liberalization policies. However, in comparison with China, India is at a much slower growth pace considering it had been practicing liberalization policies with its economy since 1978. This slow growth is attributable to the major obstacles hampering the swift implementation of reform policies and liberalization within their market. In fact, analysts argue that the economy of India could grow as fast as the economy of china is it removed the main obstacles and as such, free its economy to enjoy maximum growth at the a rate of 10% on an annual basis. However, in comparison to China, the economy of India still records a slow growth despite the economic reforms. As such, significant debates take place in the country in relation to the liberalization policies adopted by the country, especially in relation to the country’s economic growth strategies. For instance, from as early as 1992 when the country began implementing liberalization policies, the income inequality gap deepened in such a way that consumption among the poorest remaining stable whilst the wealthiest in the economy generates a huge percentage of the country’s economic growth. This attracts opposition from critics and other persons not convinced that the economic reforms instituted by the Indian Government are bearing the right fruits, as they should. One particular aspect under consideration is the deepening, and subsequent drop of the Gross Domestic Product (GDP) of the country, which hit the lowest in the 2012 to 2013 fiscal year, nearly a decade or two after the country began implementing economic reforms and liberalization policies. During the mentioned fiscal year, the country recorded a GDP growth rate by a mere 5%, which is far too low in comparison with the economic growth recorded in China at 10% on an annual basis. This situation calls for more criticism from opponents of the economic reforms practiced in India, majorly because of its failure to address a number of key economic issues such as increasing employment opportunities, improving nutritional values in terms of food intake in calories, as well as the slow growth of its exports and international trade activities. This situation leads to a worsening level of the current account deficit in the country in comparison to the economic periods prior to the reform period. B. Why it is of interest Recent growth of the economies of China and India was substantial. While there are many different factors associated with this growth, it is interesting to investigate what contribution and impact had economic reforms undertaken by the governments of these two countries. Impact of Economic Reforms in India The Indian government, as mentioned earlier, made great efforts to improve its economy by putting in place strategic economic reforms to liberalize and open up its economy. As such, some of the major economic reforms undertaken in the country since the start of the economic reforms period in 1991 ushered the country into a new phase of economic development and growth geared towards enabling the country to become a globally competitive economy. These reforms opened trade practices in the country in such a way that it was more accessible for entrepreneurs to start and run business activities within the country. This was unlike the previous years where it was very difficult for one to start and operate a business activity within the country. In addition, the economic reforms contributed towards foreign direct investment practices whereby it was now possible for the foreign investors to come into the country and set up their investments, or do import and export businesses. Another major development in the economy brought about by the reforms instituted by the Indian government was technology inflows. This enabled the country to have great strides in technological development, which is the biggest driver of economic development. Currently, India stands out as one of the best exporters of technological material and devices in the world. In addition, India is now taking a leading role in revolutionalizing the medical and health care sector by being the best in major surgical operations and physical therapy, all thanks to technological reforms and development. The private sector in the country is now taking a leading role in shaping economic growth and development within the Indian economy, as opposed to the days before the government implemented these reforms where the government had to play the center stage in spearheading economic development and growth within the country. The increase in the participation of the private sector in economic development, as opposed to the diminishing participation of the public sector in economic activities is one of the strategies brought about by the economic reforms in the country. This in turn increases the ability of the country to take advantage of economic opportunities with the private sector playing the leading role in managing the rate of economic growth in the country. In addition, these reforms empowered the private sector to take charge of the economy by playing a leading role, which witnessed a corresponding reduction in the role that the public sector played within India’s economy. Other notable effects of the economic reforms within the Indian economy were considerable changes in the domestic policies on trade, factor prices, intersectoral allocation of resources, as well as economic welfare. Results from the computable general equilibrium (CGE) model, specially designed to undertake analysis of potential economic effects of the reforms on India’s economy shows that despite the pitfalls in the economic growth, the policy reforms on the economic policies of the country greatly empowered the country to improve and be among the leading economic powerhouses in Asia. The CGE model on India features closely on the special characteristics of the economic structure of India, such as its agricultural sector, allowances provided for state ownerships, as well as administered policies. As such, policy reforms in the country led to an increase in real returns to the economy, such as the returns on land, labor, as well as capital, in relation to the shift in terms of trade in favor of the Indian agriculture. In addition, the reforms also brought about efficiency-enhancing intersectoral shifts in allocation of resources with notable increases in the economies of scale across most manufacturing sectors in the country Impact of Economic Reforms in China The Chinese economy, on the other hand, had a smooth sail in development after implementation of the economic reforms. This led to the consequent growth of the country’s economy from a sleeping economy to the second best economy across the entire globe. Nowadays, Chinese firms are winning contracts ad working across various industrial sectors in the world. This is all thanks to the liberalization policies adopted by the Chinese government that enabled other countries, as well as foreign investors to create trade partnerships with Chinese investors. Currently, Chinese is the leading importer of goods from most developing countries, toppling the United States from this position, which it held for years under the AGOA trade partnerships with African countries. However, this is just a strategy by the country to attract new foreign investors who come in to promote and grow the Chinese economy. Furthermore, this openness to trade enables these countries to allow Chinese firms to sell their products and services in their domestic markets. Currently, Chinese exports are the leading in volume across most export markets in the world. China has some of the largest manufacturing firms in the whole world, and these firms not only sell their products within the domestic Chinese markets, but they also sell their products to the rest of the world, especially in developing countries such as in Africa. The Chinese industrial sector is the largest manufacturer of electronic products, especially mobile phones and other telecommunication devices. In addition, this Chinese economy is a thriving center in automobile industry, and as such, sells most of its products as exports. An attractive factor of the Chinese economy is its low prices of goods and services as comparative to other market prices. The Chinese products are the cheapest in prices within most markets, especially in comparison to similar products across various global markets. These low prices allow create more opportunities for Chinese products and services to sell in huge volumes across various international and domestic markets. These reforms created an environment that facilitated fast economic growth and development through creativity and innovation by giving the private sector power to control the economy as opposed to the public sector. The Chinese industries are the most creative in the entire globe, and as such, continue coming up with inventions of new products and services that enable them to create a competitive edge over other products from different markets. Consequently, the products from Chinese manufacturers are growing in sales volumes across the world, being one of the main reasons why the private sector is a significant contributor to the GDP of the country. The private sector is a major player in the economy and moves great volumes of products and sales by collaborating with foreign industry players through import-export partnerships. These economic reforms and trade liberalization policies also opened doors for Chinese companies to operate and sell its products in foreign markets. Currently, China has the highest number of contractors working in foreign countries, especially in Africa, across various industries such as roads and constructions, telecommunication, water engineering and management, as well as broadcast and print media. However, these economic reforms and developments did not fail to tag along with various negative effects to the economy, as well as to the Chinese people. As mentioned earlier, the Chinese manufacturers are the largest by volume across the world, thereby making China one of the largest exporters of finished products and services in the world. Much as these economic reforms promoted economic growth and development, they paid little or no regard to the effect it had on the environment. As such, it is very rare to find a Chinese firm considering the environmental implications of a certain development as long as it will lead to positive economic growth. This disregard to the environment while making development plans has now made China the leading country in industrial wastes and environmental pollution in the world Currently, China is the leading producer of greenhouse gases across the world. This is all thanks to its numerous industries that emit copious amounts of carbon gases to the atmosphere. In fact, some of the aristocrats of China are relocating to other countries permanently as they flee from the health risks and implications arising from China’s fast industrial growth and development. The atmosphere across China is much polluted with carbon gases, which is the main cause of fog and mist during early morning hours in most cities across china. In fact, the air pollution is so high that in some cases, the city metropolis of Beijing has to lock it down in order to reduce the exposure of its residents to the smog. As such, ordinary Chinese citizens suffer greatly from acute respiratory complications owing to the high level of air pollution. Apart from air pollution, China also suffers from grave water and land pollution, especially at construction sites, mining sites, as well as other industrial sites. The Chinese developers are so much after the benefits accruing from developments as opposed to the negative side effects that arise from inappropriate evaluation of its effects to the environment. In fact, analysts argue that this is one of the major reasons why China will fail to topple America as the super power country. The main reason behind this argument is that while the Chinese industries are developing and producing the best products for the market, its environment is depleting and degrading gradually to an extent that at some future date, it might not be habitable for both human and wild life. Some even claim that it will not support any plat life because of its high rate of pollution. As such, lessons from Chinese growth, in comparison to America is that development and economic growth policies should consider the negative effects on the environment because at the end of the day, we still need a safe place to reside. C. How it relates to the course As the course studies Micro- and Macroeconomics, the topic proposed for research is directly referred to the macroeconomics of two developing countries: China and India. Relation to the Course This is a micro and macroeconomics course, which considers various economic perspectives in relation to two major economic powerhouses in Asia, which are China and India. The research topic undertakes a comparative study on the economic reforms in China and in India. These reforms have an impact to the economy, which is the key link of this research topic to the course of micro and macroeconomics. The course purposes to explore the impact of various economic reforms and policies to the economy, especially those that lead to economic growth and development. As such, this study explores some of the positive measures takes in instituting economic policies within these two countries that transformed their economic performance and spurred economic growth. Under microeconomics, we study about the various economic policies that a government has to come up with in order to spur economic growth and development, as well as tae a keen look at the various effects to the economy of these policies and decisions. In this case, we investigate the various reforms and policies undertaken by these two governments in order to transform their economic performance and growth. We realize from the comparative study that trade liberalization and a twist of Foreign Direct investments (FDI) policies lead to a great positive transformation in the economic performance of a country. For instance, the economic reforms and policies taken by these two countries were the key drivers to the economic changes and developments that they recorded as from the time they began instituting the policies China, for one, grew from being an underdog in the Asian economic platform to being the world leader in economic growth and development, second only to the United States. On the other hand, the Indian economy grew significantly after it began setting up economic reforms that revamped its industries as well as its agricultural sector. From this comparative study, students learn that the best economic decisions when implemented lead to a transformation in the economic growth, development, as well as performance of the said economies. This is from the case studies of both the Chinese and the Indian economies, which transformed remarkably after the implementation of the afore-mentioned economic reforms. Read More