Chinese Policies and Strategies of Growth - Literature review Example

Client inserts his/her name Client inserts tutor’s name Subject of Study Date Introduction Some three decades ago before China initiated its economic policies and strategies reforms, it was a stagnant economy, poor, centrally controlled, inefficient and relatively cut off from the global economy (Lim, Ian & Paul et al.2011). Such conditions prevalent in its economy forced the government and policy makers to make necessary policy reforms in order to stabilize the economy. In 1979, the Chinese government was forced to open up to foreign trade and investment and implement policies that enabled free markets. Since the reforms were implemented, China has remained among the world’s fastest growing economies. The Chinese government and policy makers have been able to accurately interpret the prevailing conditions of its economy to implement policies and strategies of growth that are able to boost its economic growth. The paper aims to discuss how the context and the prevalent conditions in a nation determine its policies and strategies of growth with reference to China. Before 1979 when China implemented reforms affecting policies and strategies of growth, Mao Zedong, who was then the nation’s president maintained a centrally planned economy. A large portion of the nation’s economic output was managed and controlled by the state, which set goals, controlled prices and distributed resources throughout most of the economy. During 1950s, most people residing in rural places of China were farmers. Therefore to support industrialization, the government was forced by the prevalent conditions to make policies and implement strategies which supported significant investments in physical and human capital in 1960s and 1970s. The policies and strategies saw to it that by 1978, almost all of the industrial production was centrally managed by state-owned enterprises, according to centrally planned production goals. On the other hand as Qian & Wu (2008) explain, the government policies generally barred private enterprises and foreign investors. The main goal of the policies and strategies was to make Chinese economy self-sustaining. On the contrary of what was expected, the 1960s and 1970s Chinese policies kept the economy stagnant and inefficient (Jianwu and Kuijs, 2007), the major reason being that most aspects of the economy were controlled and run by the central government. This meant that most profit went to the government and little if any was left for the firms, farmers and workers. The context and prevailing conditions in the economy back then included: no competition among firms; limited or no foreign investment; price and production controlled only by the central government and distortions in the economy. Kuijs & Tao (2006) explain that during this time, Chinese living standards were considerably lower than those of many other developing countries. After the death of Chairman Mao in 1976, the Chinese government in 1978 was forced to break away from the Soviet-style economic policies and strategies in order to stabilize the economy. From the year 1978, the Chinese government focused on reforming the economy by introducing new policies that supported free market and opened up trade for foreign investors especially the West (He & Louis, 2007). The Chinese government hoped that the policies would change the prevalent conditions in the economy, by initiating economic growth and raising the living standards. Piya (2013) points out that, social, economic and political internal and external pressures, though unpleasant in some way influence policy makers to come up with policy reforms, which in calmer conditions, would generally be resisted. The context and prevalent circumstances, “pressure” in China’s economy that forced the policy makers back in 1978 to make some policy changes was the threat of an economic crisis. An economic crisis, though disadvantageous, can be advantageous in the sense that in the context of reform, it may help policy makers to evaluate the risks and payoffs concerning alternative policy decisions, and thereby balance policy priorities so that new approaches surface out of earlier failures (Bai & Kaushik, 2012). Therefore, despite the fact that a crisis has various negative consequences, it makes policy changes necessary and force policy makes to re-evaluate the existing policies. Ravallion and Shaohua (2007), explain that after the Cultural Revolution of 1966-1976, China’s economy was on the verge of falling down. During these times, more than two thirds of Chinese population lived below the poverty line. The prevalent conditions were stagnant agricultural growth, fast population increase and food shortage. Generally, it can be said that most of the Chinese people lived in poverty during these times. However, the context and prevalent conditions in the economy influenced policy makers to reevaluate the existing policies and make necessary changes where possible, in order to stabilize the economy. When the Cultural Revolution came to an end, most of the leaders and policy makers were convinced that the existing economic systems was not efficient enough and were ready to make the necessary reforms. Under the prevalent conditions, many of the top leaders were more than willing to listen to different views and support open policy discussions. In other words, the context and prevalent conditions provided the would-be policy reformers with a chance to push for innovative and improved agendas. Bai and Kaushik (2012) argue that significant policy reforms do not come automatically without the pressure resulting from unfavorable prevailing circumstances in the economy. It is during such unfavorable context and prevalent circumstances that policy makers seize the opportunity to push for policy reforms in order to improve the economy. A good example of this in China is the rural reform initiated by Du. Chinese farmers, who had undergone intolerable conditions during the period of Great Famine in the late 1950s and early 1960s. These farmers through experience knew that collective farming was not efficient especially during times of crisis. So with another forthcoming weather shock coming into view in 1977, The Fengyang County government in Anhui province, the province that was badly hit by the great famine of 1950s, decided to contract the collective land to farmers because they realized that the communal agricultural system could lead to another famine in the occurrence of severe shocks. Isaksson (2007) provides a broad literature review of changes that were done on land tenure systems in China, in order to improve agricultural productivity and avoid shocks in case of famines. All the changes that were done on land tenure policies were as a result of prevalent adverse conditions that resulted during the great famine of 1950ws and early 1960s. China implementing the policy that enabled it to join the World Trade Organization (WTO) is another example of the influence of the context and the prevalent conditions on a nation’s policies and strategies of growth. Bolesta (2007) explain that back in 1990s, changes in the banking policy were met with enormous resistance because state banks were not willing to give up their dominance positions. On the other hand, many local governments resisted the policy reforms because they were afraid of losing their ability to control credit, which made it almost impossible for state banks to function as profitable banks. The context and prevalent conditions therefore made it almost impossible for any reforms to be made on the inefficient banking policies. The conditions therefore forced Chinese top leasers to take a bold move of registering the nation in World Trade Organization (WTO). Although the WTO gave household banks protection for a period of few years, in the end, most of the obstacles to entry in the banking sector had to be cleared such that State banks were ultimately forced to compete equally. The context and prevalent conditions created by WTO in Chinese economy made it possible for the government to induce several changes in the banking policy which affected State banks, who initially were great contesters of any banking policy reforms. Jianwu and Kuijs (2007) point out that the reforms that were implemented in the banking world have so far been beneficial to state banks, despite the fact that these banks initially resisted the reforms. It is reported that after entering WTO, most Chinese banks have reimbursed their huge loans; several state banks have listed their stocks in overseas markets and are subject to the analysis of global monetary markets. On the other hand, local banks branches have the ability and freedom to deny local official loans. This illustrates how the context and prevalent conditions in a nation’s economy can influence policy makers and government leaders to initiate and implement policy reforms which at the long run, become beneficial to individuals and institutions that initially resisted the reforms. Since the implementation of various policy reforms in 1979, China has been one of the world’s fastest growing economies for the last three decades (Bolesta, 2007). However, recently in 2008, China’s economic context and prevalent conditions were greatly affected by the global economic crisis. The nation’s exports, imports and FDI tremendously declined, the growth of GDP slowed down, and millions of Chinese employees became jobless. The unfavorable prevailing conditions in the economy forced the Chinese government to respond immediately by implementing new growth strategies such as a $586 billion economic motivation pack up, relaxing the tight banking policies in order to increase bank lending and offering a range of incentives to enhance domestic expenditure. All these policies gave China the ability to weather the effects of the sharp international fall in demand for Chinese products, while several of the world’s leading economies underwent negative or sluggish economic growth. According to Pyo (2009), despite the financial crisis of 2008, the Chinese government still aimed to achieve 8% growth by implementing the various named policies. Jianwu and Kuijs (2007) point out that every policy has its negative and positive consequences. Despite the fact that China has recorded tremendous growth for the last three decades, the policies implemented have also created some negative circumstances in the economy. Since the beginning of China’s modern industrialization, there have been various environmental challenges that have captured both domestic and international attention. Since 2007, China has outdone the US as the world’s largest green-house gas emitter. The policies that enabled rapid industrialization have on the other hand, encouraged resource depletion, and enormous environmental pollution. The context and the conditions resulting from these policies forced the government to revisit and revaluate its growth strategies and policies. The context and the unfavorable conditions in the economy further forced the Chinese government to create and implement a major policy, which could effectively address the environmental impacts of economic growth. Kuijs and Tao (2006) explains that policies that support the growing of gross domestic product at any cost create a series of unfavorable prevalent conditions, which force a nation’s government to implement other polices to neutralize the negative consequences. Kuijs (2010) point out that the Chinese government having recognized the unfavoarable context and prevalent conditions in its economy as a result of intensive industrialization, it provided incentives and enacted new policies that would ensure environmental degradation and unsustainable resource utilization as a result of intensive industrialization was minimized. The adverse conditions such as enormous environmental pollution due to intensive industrialization forced the policy makers to review the existing growth policies and enact new environmental policies. The policies implemented were designed in such a way that economic growth was not interfered with and at the same time minimal environmental degradation occurred. As Kuijs (2010) explain, the Chinese government hopes that the policies will push the economy up to 2020 and behold with no occurrence of unfavorable circumstances in the economy. Conclusion From the paper, it is quite clear that the sentence “it is the context and circumstances prevalent in any nation that should determine its policies and strategies of growth" is very true with reference to China. The policy reforms that were made by the Chinese government back in the year 1979 were all as a result of unfavorable conditions in the economy such as stagnating economy, high rates of unemployment, inefficiency, lack of foreign investors and poverty. Recently in 2008 after the global financial crisis, the Chinese government realized the unfavorable conditions present in its economy and implemented new policies that would enable its economy to survive such hard economic times. On the other hand, the growth strategies that the Chinese government implemented three decades ago have created an unfavorable context and conditions that force the government to keep on reviewing their policies and making the necessary changes in order to maintain an upward economic growth. So it can be concluded that the context and the prevalent conditions are the major determinants of a nation’s policies and strategies of growth. References Bai, T. & Kaushik D. (2012). Balancing Priorities: a Collection of Essays on India. Deutsche Bank. Bolesta, A. (2007). China as a Development State. Montenegrin Journal of Economics. No.5: 105-11. Isaksson, A. (2007). “Determinants of Total Factor Productivity Growth: a Literature Review.” Literature review, Research and Statistics Branch, United Nations Industrial Development Organization, Vienna. Jianwu H. & Kuijs L. (2007). “Rebalancing China’s Economy: Modeling a Policy Package.” Working Paper, China Research, World Bank. Kuijs, L. & Tao W. (2006). “China's Pattern of Growth: Moving to Sustainability and Reducing Inequality.” China and the World Economy 14(1): 1-14. Kuijs, L. (2010). “China through 2020: a Macroeconomic Scenario.” Working paper, China Office Research, World Bank. Lim, E., Ian P., Paul R. & Michael S. (2011). “Medium and Long Term Development and Transformation Of the Chinese Economy: an International Perspective.” Synthesis report, Beijing Cairncross Economic Research Foundation, Beijing. Piya, M. (2013). Globalization and sustainable economic development: issues, insights, and inference. New York: Palgrave Macmillan. Pyo, M.C. (2009). China: Aiming for 8% Growth Despite the Financial Crisis. SERI Quarterly: 2:43-49. Qian, Y. and J. Wu (2008). Transformation in China, in: (eds.) J. Kornai, L. Máltyás and G. Roland. Institutional Change and Economic Behavior. Basingstoke, UK and New York: Palgrave Macmillan: 38-63. Ravallion, M. & Shaohua C. (2007). “China’s (Uneven) Progress against Poverty,” Journal of Development Economics, 82 (1): 1‐42. Read More