Chinese Economy - Case Study Example

Question: It is widely assumed that the free market economy is invariably superior to any form of planned economy. Critically analyse to what extent the growth of the Chinese economy challenges that assumption. Introduction Free market and planned market or economy has been under loggerheads for more than a century. While the community centred world continued to work on the planned economies, the west went the free economy way. Whereas, the planned economies suffered a major set back when the Russian economy fell taking with it many of the planned economies as well, the free market economy kept on improving on its performance. Or is that true Chinese market for instance, has rolled out from the planned economy to a free market economy to a degree retaining its own planned model in the core of the change. At this level, the impact of the planned economy and the change that it has brought into China has been impressive1. This paper targets to present both the sides of the market economies. An analysis has been done at the end of presenting the pros and cons of both the free market as well as the planned economies. Planned Economies and their Growth Planned economies have been the 'successful' economies of the yesteryears. The Russian, the Chinese economy before the changes in the economy all were adopting the centrally planned economy. This had typically, the people at the centre of the entire plan. Whether it is agriculture or the industry, the state was the centre of all action. Large scale investments were done by the state to ensure that the progress was continuous. Planned economies target was to bring parity among the communities and the individuals. The individuals yielded place to communities. The planning was for the communities and the individual was not considered for economical study. However, the individual formed the major part of their plan for the future. Education and the individual development was a part of the community target to ensure that the growth continued to exist. While there was a rapid progress in the initial days of the community based planned economies, slowly decadence set in. The plans did not bring about the results that were really needed. The rich-poor divide and the class divide though was fading, continued in its own way. The positive aspects of the plan were that there was an overall education to all the citizens of the community. Planned economies could forge large scale projects that could not otherwise be conceived. The same way, the state could embark on global scale projects that would reduce the cost of production and at the same time could contain the inflation rate in the country as well. Another major advantage is that the equality of the people in front of law was also realised. This made the entire process attractive to the common man. Fallout of Planned Economies Planned economies had the following shortcomings: 1. Over a period of time the entire process became very corrupt and could not maintain the commitment for community. 2. Planned economies had to think out all the possible factors that could bring about the changes in the economic status. The numbers of factors were so large that it is almost impossible to relate every one of them. This results in the failure of the plan and hence the commitment of the people in the work. 3. Planned economics were in existence in many of the countries. Both in the case of democracies like India and in the case of the left leaning governments in the case of China. In both the cases, the development anticipated was not obtained as in the case of market economy. Most of the countries therefore, are migrating to the market economy structure instead of staying with the planned economy. 4. Though they are moving to a market economy, many of them stay with a phased withdrawal of the planned economy. This has resulted in these countries, including China, having a market economy as well as partially planned economy which helps the country to consolidate and migrate to the new economic pattern without much hassles. Market Economies and their Growth The market economy, more particularly, the Chinese have progressed or transitioned from a planned economy to the market driven one. Many of the countries in the Eastern Europe including Russia and Czechoslovakia, adopted the big bang theory of the reforms process. This ensured that the country migrated to the new decree on one bright day, instead of a gradual and steady move in steps. It has been always thought that while migrating to market economies, the sudden and strong transition from one process to the other produces results. While these countries in the East Europe have adopted the big bang, China has adopted a slow transition. The economists were all along of the view that the big bang change to market economy would produce better results vis--vis the step by step change. China proved the theory wrong by slowly and gradually improving its economic status and vying for the super power position. Market economy has seen the surge of the nation's GDP growth rate to well over 10% in the last decade. The current growth rate is more stable. The opening up of the capitalist market in China resulted in a flood of foreign investments that has pushed the overall market up and has resulted in the growth of the economy. Many analysts including Will Hutton has indicated that the country does not have a stable economic structure because of the inherent weaknesses in the financial system2, inefficiency of the large scale businesses run by the state and thriving only on exports. All these according to him, could result in the bubble of China bursting in its seams sooner or later. Many others feel that the market economy transition of China is worth emulating. John MacMillan and Barry Laughton3 refer to the growing economic strengths of the country and the slow and in step change is a continuous on going process for economic correction. The authors also observe that the country has corrected itself as they progressed and the administrators have taken the right decision at every stage. This has resulted in a better growth rate and an improved economic status. Many of the policies in large countries are forced for reconsideration due to popular appeal and action. All reform processes will invariably be protracted and could cause a number of errors and migration from standard best practices. Therefore, it is essential for the administration to keep correcting itself and bring about the changes in their own way rather than adopt a laid down process. The country has not embarked on large scale privatisation. Instead the state owned companies have also been producing more and they have been competing with the other private enterprises. The country has stressed on the need to compete and not on privatisation. This has lead to a clearer but more acceptable form of working both for the consumers and for the labour force. The market economy has brought in a rate of growth in the Chinese economy that is unparalleled so far. However, the country's 'explosive economic reforms will create seismic tensions within the one party authoritarian state. Can the centre hold' is the question that Hutton poses. He also reasons that4: "The west is unforgivably ignorant about China's shortcomings and weaknesses, which leads it vastly to exaggerate the extent of the Chinese "threat". China is certainly emerging as a leading exporter, but essentially it is a sub-contractor to the west. It has not bucked the way globalisation is heavily skewed in favour of the rich developed nations. Its productivity is poor; it lacks international champions; its innovation record is lamentable; it relies far too much on exports and investment to propel its economy. To characterise China as an unstoppable force whose economic model is unbeatable and set to swamp us - the stuff of almost every ministerial and business lobby speech - is to make a first-order mistake." According to him, China is no threat and the growth of China need not attract the attention that it is currently commanding. Hutton goes on to emphasise the fact that the exponential growth China has enjoyed is unsustainable and he also goes on to say that the country is on the verge of a collapse or a convulsion. While some perceive the state owned sector operating in China as a deterrent to rapid progress and a drain on the exchequer, there are others who look at it as a dampener of the rapid economic change. There are always fall outs of any economic transition. The inefficient working of the state enterprises absorbs some of the social issues like unemployment by lessening the number of people who will go on the streets. This makes the load of the society shared across it thereby reducing the overall impact of unemployment due to economic policy changes5. Large scale financial discipline would be required to ensure that the companies are appropriately disciplined and the investors are not cheated. Market control by the government and the bodies created for governance need to be stricter and closer to the ground during the change over period and this has been happening in China. While this is the view espoused by MacMillan and Naughton, others feel that there has been rampant 'lie'ing by Chinese government in such cases. The truths of the cases do not come to the surface as in the case of SARS endemic. As Gang Lin6 says, the issues concerned with the rising costs of both labour and space can be offset by moving across to the western China which is still under developed from the swiftly developing Eastern China. The competitive labour costs and the large scale production facilities that have come about in the country would help it progress further. Typical example will be the tourism industry in China which has developed manifold and today it is one of the top five countries in the tourism industry. It was no where near the top hundred few years back. This has happened because of the large scale investments and privatisation in handling the tourist destinations. This includes even historical locations which have been redesigned and presented by large tourist operators in US and Europe. In contrast to this, Jagdish Bhagwati7 says in his review of Hutton's book, that despite large scale investments in China on computers and IT in 1981 - 1995, it still trailed behind India in computer technology and particularly software. This, he quotes from Hutton, is caused by the restricted freedom that the people in the China enjoy. They are inclined to do what the 'planned' growth allows them to. This is possibly the reason for a slow down occurring in the Chinese growth and they could move into reverse gear soon according to the author. Fallout of the Market Economies Market Economics is comfortable in smaller economies whereas in larger ones, it generally opens up a large sector of the working class that suffers under the capitalistic industries. The class divide widens and sooner or later it would bring the entire question of market economy under surveillance8. There are a number of fallouts of the market economy which could be identified. They are given below: 1. The rich-poor divide is a primary concern of the market economy. The poor will suffer more while the rich will contribute to the increase in the price and inflation, the poor will not have a commensurate increase in their earnings. 2. The competition between specifically the state owned and the private owned will intensify resulting in mostly shutting down the state owned units or laying-off people in order to turn it profitable will happen. This would again result in large scale unemployment and underemployment. This will contribute to labour unrest and could result in internal strife. 3. Government will slowly move under the control of the business barons who in turn would gain by employing government and its machinations to his advantage. Even in developed economies like US and UK these are happening. As Hutton suggests, there is a possibility that China might get into a foreign adventure if there is lots of internal pressure. Analysis This analysis is based on the references already made earlier. Every good system has its own faults and weaknesses. This is applicable to both the systems of market. While the market economy is controlled by the entrepreneurial spirit of the people, the planned economy is state controlled. An authoritarian state could cause major ramifications in the way freedom is enjoyed by the people. Over a long period, this would lead to corruption and other imbalances could get added on to the system. The centrally controlled community based planning would benefit the individual and the individual gets trained and educated to provide the best results to the country and therefore, the community that is breeding him. The equality before the law and the honour of the individual, theoretically, is held valid in the community oriented state. However, in many of the cases this has been falsified with power centring in the hands of the party's high command and the people slowly losing their trust in the party. This happens because of the large scale corruption, media control and other such authoritarianism. Over a period of time, people would feel the lack of freedom and this could cause civil unrest which will not contribute to stable economic growth in the country. On the other side, the market economy does not do justice to all classes of people in the country. The rich poor divide seems to have widened in most of the countries that are practicing the market economy. Similarly, large scale unemployment and class neglect exists in such economies. In order to set this right, most of the pluralistic societies tend to bring in a semblance of government control in all activities of the market. This ensures that all markets including the stock market, commodities and raw material markets, are all brought under government observation. This would ensure that there is no misleading marketing strategy that is adopted by any company or person. Though this would contribute to stable growth rates and increase the living standards of the people in the country, this need to be monitored. There has to be appropriately controlled so that there is no class suppression and there are equal opportunities to everyone in the society. As Hutton9 says, globalisation needs to be governed. Conclusion As explained in the analysis section, it can be seen that there is no one rule that can be called as the best practice. The best practices that have been adopted earlier by other countries were not adopted by China and it still continues to progress though there are questions about its stability. Whereas, a country like Japan which did not have any such macroeconomic problems continue to slow down in its growth even after the rapid strides it took earlier on. Planned economies might and would run into legal and civil issues over a period of time. Therefore, there can not be many questions on the fact that the market economy is the one that provides the best solution for the developing countries, particularly in the context of China. However, they are not all good. The government should have appropriate controls to ensure that the free market is not misused and appropriate legislated support should also be provided to the weak in the society. References Read More