Industrialization in China - Literature review Example

Can China overcome "shallow" industrialization and effectively upgrade its industries? (Name) (Course) (University) Date of presentation: Lecturer: Can China overcome "shallow" industrialization and effectively upgrade its industries Introduction Although China has overcome many obstacles to become the world’s second largest economy, it still has a long way to go in attaining the level of industrial success attained by other developed economies. Currently, China’s industries are quantity-motivated and not quality oriented. As a result, China has built the most energy-intensive industries and which make significant contribution to environment degradation. The following research paper evaluates the prospects of China overcoming shallow industrialization and effectively upgrading its industries. The paper begins with an overview of the industrialization strategy adopted in the last fifty years. The paper then discusses the institutional and policy factors responsible for China’s shallow industrialization program. The last part of the paper is a critical discussion of whether China can attain heavy industrialization and the means by which the country can attain such a demanding prospect. Review of China’s Industrialization Program From 1953 to 1960s, China adopted an industrialization strategy similar to that of the Soviet Union. This strategy granted top priority to heavy industry as the guiding principle in economic development. During the 1960s, the Chinese government concentrated its physical, human and financial resources and upgraded heavy industry projects. By adopting such a guideline, it was predicted that the country could speed up the industrialization process in a considerably short period of time and become a highly industrialized socialist country by1970. Despite the zeal, this arrangement did not make satisfactory progress (Easterly, 2002). Starting from 1975, the government made substantive changes in its economic growth strategy and strived to sustain a high growth rate in output through capital input. High growth targets were imposed on production in heavy industries such as coal and steel. In the next few years, major reflections occurred within the government regarding the industrialization and economic development path that had been followed in the past years. It became apparent that China could not achieve rapid industrialization and modernizations if the country could continue following the path of factor-driven development. As a result, the government, in 1980, put forward guidelines for embarking on new industrialization path with more real benefits for the people. Based on the experience gained from earlier development program, the government set out for the realization of industrialization through productivity-driven strategies (Selden, 2006). The economic reform guidelines that have been enacted from 1995 have regarded economic restructuring and upgrading of industries and human capital as the main thread of economic development and rapid industrial growth (Easterly, 2002). In the course of the past one decade, reform efforts have been made to eradicate the influence of the socialist industrialization program and to revamp the outcomes of previous industrialization efforts. In particular, the institutional arrangements and mindset underpinning the traditional industrialization strategy are being addressed actively. But because institutional policies compatible with the traditional industrialization strategy are still pervasive in a large scale, practices which rely on quantitative aspects of industrialization tend to be adopted easily. This has made China to lag behind developed economies in respect of quality of industrialization achievements. Institutional Foundation and Reasons for China’s Shallow Industrialization The reasons for China’s failure to achieve heavy industrialization are related to various institutional factors. These factors have consistently encouraged slow industrialization program and growth strategy. One of these factors is that the government retains total control of resources. Although China is an open market economy, the economic system is dominated by the government and as such, the market’s role in allocating resources is insufficient (Zhang, 2003). In addition, the national economy does not allocate resources according to the principle of avoiding weaknesses while taking advantage of strengths. As an example, state owned enterprises retain monopoly in key sectors of the economy such as energy and infrastructure development. Moreover, reforms in the country’s financial system are not efficient by world standards since capital and credit allocation are considerably influenced by the government at different levels. The second factor is that China’s political success is measured by growth rate in GDP at the centre stage. Starting from mid 1990s, China has adopted the national accounts system as the principal economic accounting system. This system takes account of the production, distribution and consumption activities as an integral totality. Nevertheless, the traditional system of striving for high GDP growth and emulating other economies in material production still persist as national objectives play a major role in gauging political and government achievements. As a consequence, government officers at various levels of the hierarchy are motivated to use their powers to allocate resources to achieve high output rates (Selden, 2006). The third factor is that the Chinese government uses a production-oriented value added tax system. Currently, China collects over half of its tax revenues from the value add tax. The rate at which this tax is imposed is directly related to the value of local aggregate output. This factor has also provided incentive for various levels of the government to capitalize on their powers to allocate resources to industries and investments which generate heavy tax revenues (Rodríguez-Clare, 2007). The other important factor for China’s shallow industrialization is that prices of resources are often distorted. Under the country’s traditional growth strategy, the state compelled factor prices to significantly decrease so as to ensure that capital intensive industries are profitable. Up to now, the scenario where prices of important factors such as energy resources, land, capital and labor are distorted still exists (Zhang, 2003). Researchers have, for instance, indicated that because energy prices do not give a true reflection of scarcity and cost, the country’s energy consumption has increased significantly over the years. The four factors above have made it difficult to bring advantages of industrial growth into play so as to attain overall efficiency in the industrialization program. In the policy and institutional environment described by these factors, many enterprises and government agencies have preferred to depend upon massive input of cheap capital, labor and natural resources in the production of products, most of which have low technological content (Zhang & Tan, 2007). Additionally, these institutional factors have enticed Chinese industries to aspire excellence through quantitative expansion and not qualitative expansion. As a result, most of the industries have been slow or less willing to make progress in independent technology development or human capital accumulation. Overcoming Shallow Industrialization and Upgrading Industries in China Despite the challenges and shortcomings, it is possible for China to overcome shallow industrialization and become a leading industrialized economy. The crux in overturning China’s shallow industrialization success lies in steadfast efforts to stick with modern economic development reforms (Rodríguez-Clare, 2007). To match the industrialization progress achieved in North America and Western Europe, it is imperative that China embarks on new industrialization path, which regards to the development of an energy-saving and environmental friendly economy as the guiding principle for heavy industrialization. It is only by chartering such an industrialization path that the country can achieve rapid and sustained economic growth and realize the target of making the nation wealthy. Diamond (2005) has noted that in order for China to achieve the targets of transforming growth strategies, it is imperative that the country’s government initiates and deepens economic and political reforms by eliminating all forms of institutional impediments to economic transformation. Regarding the structural reforms of the economy, it is important for the government to continue with adjustments in the state-dominated economy in an attempt to break sectoral monopolies by state corporations (Young, 2000). There is also need for policymakers to speed up implementation of market-oriented reforms in the country’s financial system. These reforms should among other things result in significant reduction of government interference in market transactions. To ensure quality development and efficient functioning of China’s industries, it is necessary for the country to build an effective but limited government. A limited government refers to one that refrains from interfering in the market unless and until the market shows signs of failure. In addition, such a government should not interfere in decision making at the micro-level of the economy. The government should also give local governments, sectors and enterprises the freedom to allocate resources according to desired preferences (Chen, 2004). Chen (2004) has explained that a government geared towards heavy industrialization performs its responsibilities at low costs. Among those responsibilities, the most important are to provide an environment, which fosters the rule of law, and to administer justice impartially and fairly for normal functioning of the market economy. The second responsibility is for the government to engage aggregate tools in ensuring macroeconomic stability. Essentially, efforts by China to push ahead with modernization reforms should be integrated with efforts to improve the country’s market and economic systems. In many situations, excessive interference by the government in resource allocation is associated with imperfections in the market system and hence the industrialization program (Brown, 2003). An important task in achieving deep industrialization in China is for the government to streamline the pricing regimes of the factors of production. Currently, because of insufficient nurturing of the factors of production and excessive market interference by the government, the prices of land, capital, labor and natural resources are distorted to extreme levels. Considering the roles played by these factors in enhancing industrialization, it is imperative for the government to bring into play the market mechanism’s price setting role and to eliminate causes of distortions so that prices can be reflective of the actual cost and scarcity of resources. This will help provide a scientific basis for decision-making process at both the micro-economic and macroeconomic levels of industrialization (Selden, 2006). An equally important move to facilitate rapid and timely upgrading of China’s industries is the reforms of the monitoring and evaluation mechanism for government performance. The current evaluation method where performance by public officers is assessed only at the top level should be changed and instead, emphasis be placed on improving transparency of government performance. In addition, more emphasis should be placed on effective use of the general public’s democratic rights so that the general public and other stakeholders can participate in monitoring and evaluation of government performance. Brown (2003) has noted that it is only through effective monitoring and evaluation of government performance that reforms with real benefits to the people can be enacted. Because of the inefficiency of China’s current industrialization policies, the country’s ecological environment has deteriorated at an alarming rate. Extensive urban construction and development and the development of energy intensive industries pose significant pollution threats. In addition, such projects require a lot of water and large scale land occupation, whose utilization is already inefficient. Consequently, the projects have given rise to high levels of environmental degradation that are difficult to bring into effective control. The government has the responsibility to address the environmental threats posed by rapid industrialization programs (Young, (2000). Based on the experience of developed economies, China, as a developing economy in the final phase of industrialization need to exert efforts in the following areas: i. Encourage, support indigenous innovations, and promote scientific technologies in development of the national economy. ii. Undertake efforts to develop the productive service sector of the economy. iii. Make use of modern communications and information technologies to improve the efficiency of various industries which support the country’s economy. iv. Improve human capital by making reforms in the education system and to work hard to raise jobs so that a greater percentage of the workforce can shift from the low-efficiency agriculture to high-efficiency jobs. In conclusion, given the level of China’s resource endowment, the country can achieve industrial structures oriented towards low energy industries if there can be a sound resource allocation mechanisms. Only under such circumstances can China’s resource propel rapid industrialization. However, if the country follows the traditional industrialization path, it will easily fall into the danger of taking advantages of weaknesses while failing to capitalize on strengths. References Brown, L. (2003). Plan B: Rescuing a Planet under Stress and a Civilization in Trouble. Beijing: Dongfang Publishing House. Chen G. (2004). “The Sustainable Development Strategy: Shenzhen and China.” Speech presented at the Shenzhen Development Forum, Shenzhen, China, October 22. Chen, Z. (2004). “Why Is It ‘Hard Labor’ that the Chinese Sell?” New Fortune magazine, September. Diamond, J. (2005). Collapse: How Societies Choose to Fail or Survive. London: Penguin. Easterly, W. (2002). The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Beijing: CITIC Publishing House, 2004. Rodríguez-Clare, A. (2007). Clusters and comparative advantage: Implications for industrial policy. Journal of Development Economics, 82: 43–57. Selden, M. (2006). The political economy of Chinese development. New York: London: M.E. Sharpe. Young, A. (2000). The razor’s edge: Distortions and incremental reform in the People’s Republic of China. Quarterly Journal of Economics 115(4): 1091–1135. Zhang J. (2003). China’s Industrial Reform and Economic Growth: Problems and Explanations. Shanghai: Sanlian Bookstore and Shanghai People’s Publishing House. Zhang, X. and Tan K. (2007). Incremental reform and distortions in China’s product and factor markets. World Bank Economic Review, 21(2): 279–299. Read More