So, China, What Is Coming Next - Essay Example

Chill, China The article by Simon Long presents certain disquieting features of China’s recent military and economy avatar. In fact, the country had attracted attention of political and economic observers. Any discussion on China’s fast growing track begins from 1978. It was in this year that a sweeping reform was carried out. Prior to this, economy was having a centralized control over production and resources were allocated through state planning. This was characterized as communists’ governance, whereby the commune form of economic production was central to the centralized decision-making. World Bank (1996) summed up the outcome of such regime as follows: “… living standards in China’s less thoroughly planned economy immune from stagation. Overall (total factor) productivity declined from 1955 to 1978 despite, or perhaps because of, very high investment in heavy industry. The famines of the Great Leap Forward (11958-60) and the ten disastrous years of Cultural Revolution left Chinese society exhausted by politics and the Communist Party ready for change. Many regions had already begun to experiment with local reforms. Peasants in particular felt that collectivist agricultural policies were harming productivity and living standards. Their views carried weight because the Party had a strong rural base, so the economic improvement became a more urgent goal.” (3) There was a consensus among the leaders that they should be guided by more of market elements rather than hitherto centralized planning. However, the market elements have to operate within the communists framework. Thus beginning from 1978, the landscape of China both politically and economy began to witness sea change. Simon’s analysis in fact pitches his article on such changes introduced and what happened thereafter. China has witnessed significant economic development by global standard. In real terms, the economy was able to register an average annual growth of 9 to 10 per cent between 1978 and 2004. This increase is over 700 percent overall. The real per capita income also increased from $ 231 in 1978 to $ 1290 in 2004; an increase of nearly six times. In the World Bank scheme of analysis, an economy with per capita income of less than $ 780 would be classified as low-income category. With Chinese per capital income surpassing this critical mark in 1998, it is classified under middle-income category. With this spectacular performance, China is poised to become one of the largest economies in the world. As per World Development Report 2009, China ranks 6th highest in terms of total gross domestic product (GDP). United States, Japan, Germany, Britain and France hold the first five places. If the country’s present economic growth continues, it would even overtake Germany and is likely to become one of the largest economies in the world (Lieberthal and Lieberthal 70-81). With this increasing performance, China is poised to be a big market for companies operating within and foreign origin. Explaining Chinese growth: Until 1978, China had followed the extreme position of communism where collective ownership had underlined production and consumption. Though there was a shift in the policy framework starting from 1978, Chinese government has been following a regime of state-owned enterprises. With more emphases for State intervention in all production spheres, the role of public sector became crucial to in the growth process of the economy. In addition, the state actively participated in the infrastructure development. Such state intervention resulted in an increase in the government spending. The government owns as many as 98 out of 100 biggest companies in China. That means, not much emphasis was placed on private initiatives. Since market forces were not the guiding principle, public sector incurred huge losses. To finance the investment program of public sector units, government had absolute control over financial sector. It was also able o govern the private consumption spending. This resulted in a rise in saving rate. Government was able to direct these resources to the public sector. Since they were not operating for profit, many of these companies have become non-performing assets. This has an adverse effect on the robustness of economic growth. There has been a rethinking in the development paradigm. This has lead to the recognition that private initiatives have to be appreciated and the benefits of market forces have to be exploited to grow further. It was in 1978 that Foreign Direct Investment (FDI) was permitted but they were directed to sectors, regions and so on. Initial thrust on private initiatives was to produce for world market. In the later years, it was realized that brand image has to be promoted even in the domestic market. As a result, many of domestic companies were engaged to market their products even in the domestic market. This resulted in snatching of share of a few MNCs in electronic segment. Of late, private investment spending has become a decisive force because many of Chinese MNCs would have to take other MNCs head on in the world market. Chinese population has also increased over the year. It was around 981 million in 1980, which increased to 1.2 billion in 2004. This has given rise to the general perception that China has abundance labor supply. Such abundant availability of labor had given a clear signal to rest of the world. Cost and efficiency consideration dominate over the decision of any MNCs to locate their capital. Thus low cost of labor was indeed one of the most important factors, which brought in much of FDI. The inflow of FDI, irrespective of allegation of round tripping, is one of the highest in the world. In fact, many Japanese and US companies located their industries in China with a view to exploit low cost labor advantage. Since the domestic market was not sufficient to absorb what was produced; these companies were forced to find markets outside the country. Their trade flourished along with the arrival of FDI. To facilitate more inflow of FDI, the government established four Special Economic Zones (SEZs) in Guangdong and Fujian provinces(Khanna 215). The FDI policy was quite liberal in the sense they could wholly own a concern or float a joint venture in order to encourage technology transfer. This also resulted in a big boost for exports. Moreover, many companies that used to source components outside the home country, also established their production facilities in China due to low cost labor advantage. They went on to establish industries so that they could enjoy cost saving. As the purpose was to produce to feed the parent assembly line situated erstwhile in the world, the foreign trade account of China boomed. It was noted that Chinese foreign trade had increased over the years. A major source of strength for foreign trade is the government selective intervention. This has been largely in the form of government promoting selected domestic companies. They provided export subsidies in the form of reduced export tariff and so on in order to make these companies globally competitive. This had some desirable effects. This had reflected in a few of Chinese brands gaining a significant market share in global market as well as in US, the largest economy in the world (Zeng and Williamson 92-99). For instance, Haier Group, a leading producer of refrigerator captured nearly half of US market for refrigerators in 2002. Similarly, Guangdong Galanz, manufacturer of microwave ovens captured as much as 40 percent share of the European market in 2002. Leadership is committal to the goals: Undoubtedly, the willingness of policy makers to change their stance on polity and economic matters is the primary factor. As shown in the opening paras, Chinese government looked for change of policies. A important feature of policy making process in China was the absolute control exercised by the central leadership. However, public opinion plays an important role for implementing policies. Chinese leadership exhibited their willingness to change, but it was met with severe criticism. In fact, there was students’ restlessness in China. Students had assembled in the Tiananmen Square in Beijing in August 1989 raising slogans against the government and its policies. In no time, military rushed in and crashed the students’ strike. It was fatal incidence in the political history of China as many students lost their lives. Although the whole incidence could be interpreted in different ways, an important message was sent across China and to the rest of the world that Chinese leaders were committal on the policy changes. This was rather convincing to the foreigners. Yet another landmark that reinforced the leadership commitment for the development of China was their decision to accede to World Trade Organization (WTO). Leaders believed that acceding to WTO would send very strong signals to foreign investors and provide better market access. In order to help local entrepreneurs to become well equipped to compete with the MNCs, Chinese government sought till 2005. In the mean time, the government began to support private initiatives. Support provided to private entrepreneurs is getting fructified, as evinced by the outright purchase of PC division of IBM by Levono Group. There are reasons to believe that its economic strengths rather than military strength are dictating foreign policy in China. Though the government has assured that it would not side with any power in the world, there are indications that China is gearing to become one of the superpowers in the world. It is too early to conclude if their possession of nuclear weapons can be a major cause of worry to the rest of the world. However, the kind of perceived asymmetric warfare by the United States is certainly a major concern. To conclude: Chinese leaders have been exhibiting commitment to the cause of Chinese people. To begin with, central leadership undid the policies in 1978, sent strong message across by thrashing students’ agitations, and further improved its friendly face by acceding to WTO. They had the desirable impact on its economic growth. Of late, its economic size and growth have profound influence upon Chinese foreign policy and international relation. However, as rightly pointed out by Simon, it is the failure of its leaders to convince the world that its uprising both economically and politically would not be inimical to world peace and prosperity. It is this failure that caused discontent for the rest of the world. References Khanna T. "Billions of Entrepreneurs: How China and India are Reshaping their Futures - and Yours”. Washington: Harvard Business School Press. 2008. Lieberthal. K. and Lieberthal. G. “The Great Transition”, Harvard Business Review, October 2003 World Bank. World Development Report 1996, New York: Oxford University Press, 1996 Zeng. M. and Williamson. J. P. “The Hidden Dragons”, Harvard Business Review, October 2003. Read More