Economic Development of China - Research Paper Example

Introduction China has developed over the years from being a poor economy to being one of the largest economies in theworld. In 1978, it initiated market reforms and this marked the beginning of its development. China has since then shifted from being an economy that is centrally planned to being one that is based on the market. It has been able to experience a Gross Domestic Product (GDP) of around 10 percent every year and this has enabled many people in the economy to shift from their poverty levels. It has an estimated population of 1.3 billion people and its participation in the global economy has been substantially important and influential. It however remains to be termed as a growing economy since its per capita income is still low compared to the other developed economies and its market reforms are still not complete. Many challenges have as well resulted from its rapid economic growth and these include urbanization, high levels of inequality, external imbalance and challenges on the sustainability of the environment. It is also faced with internal labor migration and demographic challenges, which are associated to a high population of an aging population. It therefore requires policy adjustments to see sustainability in growth of China (The World Bank Para 6). The economy of china has attained a significant change over the decades and this was marked by its beginning of economic reforms that took place in 1978. Before these reforms, China had a command economy. This form of economy is also referred to a centrally planned economy whereby all or the major output from economic activities were controlled by the state. The state was responsible for setting the goals of production for the firms, allocated resources throughout the economy and set the operating prices. The individual firms of the households were in the 1950s were joined collectively into communes. In support of industrialization, the government undertook investment in human and physical capital in 1960s and 1970s. Three quarters of the entire industrial production at this time was from enterprises that were owned or controlled by the state and at this time, private businesses and foreign investment firms, which are the multinational companies, were barred. The government at this time had an aim of making the economy of china to be self -sufficient. The government policies held at this time held the economy of China into a state of economic stagnation and inefficiency. Companies, firms and the employees lacked incentives for working hard and improving their performance. This increased market mechanism roles and reduced direct government control. There lacked competition, existed limitation on foreign trade and there was a limitation on flow of investment. The economic growth and development were therefore distorted by the government control on price and production. This was characterized by low standards of living, which were below those existing in many developing countries. This existed over the years until in 1978 when the government decide to break this to improve trade by allowing participation in trading and investments in the west. This step was aimed at enhancing the economic growth and improving the living standards of the citizens of china. Increased economic growth and improvement in living standards would therefore result to the economic development of the entire state (Zhu 116). One of the reforms that were launched in 1979 was one that involved providing incentives for ownership and price for the farmers and this ensured that they were able to sell a part of their farm produce into the free market. This ensured that the farmers gained motivation from working and were able to work hard, increasing their agricultural production and that were able to contribute towards the economy in the attainment of economic growth. It also led to improvement of the living standards of these farmers therefore attaining an economic development. This reform was followed by establishment of economic zones along the coast in order to attract foreign investments. These zones were also aimed at increasing the level of exports in the country and ensuring the importation of products of high quality into the country. They were generally aimed at ensuring that the country was able to participate in the international trade and this would boost the contribution into the economic activities. Other reforms that followed were aimed at achieving decentralization in economic policymaking in various sectors of the economy ensuring that the power to formulate these policies do not belong solely to the state. Economic control of the various enterprises was distributed to the local and provincial governments and were allowed to operate on free principles of the market. Citizens were also encouraged to invest and start their own private companies and other forms of businesses. The citizens living along the coast were also encouraged to open new cities and developmental areas and this gave them an opportunity of experimenting the free reforms of the market. This also facilitated the operations in foreign trade and encouraged the citizens to participate in foreign investment as trade and tax incentives were offered. The state control on prices of commodities was also eliminated and this encouraged more participation in trade and economic activities by the citizens. Trade liberalization was another reform that ensured that trade activities were enhanced with elimination of barriers. This encouraged competition that had not been present before and increased the levels of foreign direct investment. The economic performance of China was observed to improve following the implementation of these policies and their effectiveness is discussed starting from the participation in the global market (Lardy 7). One of the reforms that were initiated is enhancing their participation in the global market. Since then, its participation in the market has been of a great impact whereby it is a consumer of a wide range of products including non-renewable products, agricultural products and a percentage of base metals. The sharp increase in these market shares since 2000 has been an evidence of economic growth of china that has been rapid. The intensity of commodity demand in china has been increasing and is currently at very high levels. The levels of energy consumption by China have been observed to be at their high levels and this has been facilitated by its high level of economic development. The growth of commodity intensity in China has been facilitated by growth in its export sector and investment in fixed assets at large scale both of which are commodity intensive (Morrison 33). In addition, a large percentage of its copper usage has been accounted by construction and investment in infrastructure. The role of China therefore in the international market, affects the distribution of demand and supply of commodities and products across markets. China has as well attained a dominant role in the market for base metals and to some extent in the markets for agricultural raw materials. Its significant role in the international market is therefore observed through the share it has on the world imports which has largely increased with increase in its economic development levels. The multinational companies in china have continually played an important role in the economic development of China. The participation of these companies has created opportunities in terms on urbanization and development in infrastructure, which has attracted more multinational companies into the country. These companies have led to the improvement of the economy’s performance as well as the improvement in the standards of living and therefore signifying economic development. More investing opportunities are emerging for both the multinational as well as the domestic companies operating in china. The multinational companies and private businesses are rapidly thriving as they try to meet the emerging investment opportunities and this in return is benefiting the growth and development of the entire economy. The availability of regional markets in the country is also helping to improve local relationships and insights (Roache 10). The private companies in china have been ranked as the most competitive and posing more competitive threat than the companies that are owned by the state. The reform encouraging participation of the citizens of china has been effected and this has been signified by the growing number of the private businesses that have emerged since the launching of the policy. The flexibility that is experienced by these private companies in China has enabled them to easily adopt the available technologies in their operations and this has facilitated their success in operations thereby contributing to the growth of the economy. The private companies in china have also been able to benefit from urbanization given that they have more knowledge concerning the growth of the cities and have been able to base their operations in these cities and therefore diversifying their operations. The multinational companies have experienced extreme competition from the top private companies in china, whose operations have been well established. The multinational companies therefore are facing the main challenge in china being competition and the best of these companies have set up their operations and therefore contributing highly to the growth of the country’s economy. They are expected to adopt a faster rate of operation by maintaining innovativeness in the kind of business and economic models that they adopt (KPMG 6). Economic liberalization has also played an important role in growth of the economy of china. Economic planning was the entire determiner of China’s economic trade in the late 1970s. The import plan by the planning commission of the state covered 90 percent of the imports and designing of the plan was conducted by the commission to ensure that the supply of equipments, machineries, intermediate goods and industrial raw materials are included. This was aimed at ensuring their availability for production of finished and final products. The ministry of foreign trade owned various foreign trade corporations which prior to 1978, had the responsibility of carrying out a plan on trade. Relative prices and exchange rates therefore played a minimal role in determining the commodity composition of the foreign trade of China. The export sector in China was made up of goods that China had no comparative advantage. The exporters therefore lacked the incentives for increasing their exports and this reduced the import levels for the country. There were several restrictions on imports at this time, they reduced with time, and the level of licensing on imports reduced by the time China joined the World Trade Organization (WTO) in 2001. There was an abolishment of import substitution by the state and many companies were allowed to engage in foreign trade. A similar measure was taken non-exports and their licensing was gradually reduced. These facilitated the economic trade in China and therefore leading to the economic growth (Lardy 10). The expansion of the foreign trade of China was also facilitated by three policies that included pricing reform and foreign exchange allocation. In the era of pre reform, when only the export of capital goods that could not be produced domestically was allowed. There followed an overvaluation of the domestic currency which resulted to an excess demand of foreign exchange relative to supply. This required the implementation of a system that would regulate these levels. The systems required the exporters to surrender 100 percent of their earning from foreign exchange to the government. It also imposed a restriction on the individuals on holding foreign currency and also imposed control on the outflow of capital. The features of the system were gradually reviewed and the exporters were allowed to retain a share of earnings from foreign exchange. The system also gave the exporters an incentive of selling into the international market and allowed them to be able to finance imports from the market. Later, the convertibility of the currency was allowed on the transactions of the current account and restrictions were eliminated on the ability of the exporters to purchase foreign exchange. Another policy under liberalization that enhanced foreign trade and consequently economic growth of China is the state’s decision of rebating indirect taxes, a measure that reduced the profitability of exporting. This rule is allowed under WTO rules and since China relies majorly on indirect taxes, it was allowed to compete with the companies and firms that depend on direct taxes. Another policy is the drawback to duty system that is aimed at supporting the processing program of China’s exports. This program aimed at rebating import duties on parts, components and raw materials used to process exports whose sale would take place at world prices in absence of tariffs. These policies led to an increase in export concentration to products that are Labor intensive and in which China has a comparative advantage. China was able to increase its levels of exports to manufactured goods. The fastest growing exports in china are labor intensive manufactured goods, toys, footwear, apparel and textiles. Through exporting these products, China was able to attain a significant share in the world exports. China has also been observed in the recent years to be a good assembly for information technology components such as computers and consumer electronics. These therefore can all be traced and associated to the economic growth of china (KPMG 12). The effectiveness of the reforms initiated in china has been observed in the faster growth rate that has been experienced following their implementation, which is largely above the rate that was experienced in the period prior to these reforms. Two main factors however have been attributed to the growth and development of the economy and these factors are capital investment at a large scale and productivity growth that has been observed to be rapid. The economic reforms have resulted to a higher efficiency level in the economy and this has boosted the output levels and increased resources to attract more investment into the country. The reforms have also led to the increase in domestic savings whose level as a percentage GDP has increased from a level of 32 percent that existed in 1979 when the reforms were initiated. The success of the reforms has also been experienced by the rise of the level of GDP, which before the reforms were initiated is estimated to have been 4.4 percent. The GDP is observed to have grown by 10 percent after this period and the evidence of improvement of living standards of the citizens is in the level of economic downturns that were experienced from 1958-1960 which led to famine and death of many people. These kinds of events are not experience since the initiation of the economic reforms. There is also an economic stimulus that was implemented following an economic slowdown and this saw the growth of the economy by 7.7 in 2012 and 2013. The International Monetary Fund had projected that the economy of china would grow continue to grow by 7.1 percent in 2015 (Roache 12). Conclusion In conclusion, the economic development of China has been observed to grow over the years enabling the country to move from poverty to being one of the largest economies. The economic reforms that were initiated in 1979 have been observed to play a significant role to the growth, which together with improvement in the living standards signify that there has been economic development. The reforms have increased the economic performance resulting to economic growth and development. Work Cited Morrison, Wayne. “China’s Economic Rise: History, Trends, Challenges, and Implications for the United States”. Congress research service, 7.5700 (2014): 1-36. The World Bank. China overview. 2015. Retrieved from: http://www.worldbank.org/en/country/china/overview Lardy, Nicholas. “Trade Liberalization and Its Role in Chinese Economic Growth”. Institute for international economics, (2003): 1-15 KPMG. MCNs in China: making the right moves. 2014Retrieved from: https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/MNC s-in-China-201409.pdf Roache, Shaun. “Chinas Impact on World Commodity Markets”. IMF Working paper, (2012): 1-23. Zhu, Xiaodong. "Understanding Chinas Growth: Past, Present, and Future." Journal of Economic Perspectives, 26. 4 (2012): 103-124. Read More