Question

China: Development Strategy and Economic Reform

1) What were the major pre-reform problems in the Chinese economy?

2) Describe a major reform in China’s gradual transition to a market economy. Explain why the reform was carried out and what the effects of the reform were.

3) What, in your view, are some of the key problems in the Chinese economy? How would you address these problems if you were asked to provide policy advice to the Chinese government?

Answer 1

1.

During the pre-reform period, Chinease agricultural performance was extremely poor and food shortages were common. After Deng Xiaoping implemented the household responsibility system, agricultural output increased by 8.2% a year, compared with 2.7% in the pre-reform period, despite a decrease in the area of land used.

Before the reforms, the Chinese economy was dominated by state ownership and central planning. From 1950 to 1973, Chinese real GDP per capita grew at a rate of 2.9% per year on average, albeit with major fluctuations stemming from the Great Leap Forward and the Cultural Revolution.     In the pre-reform period, industry was largely stagnant and the socialist system presented few incentives for improvements in quality and productivity In the pre-reform era, government was funded by profits from state-owned enterprises, much like the Soviet Union.As the state sector fell in importance and profitability, government revenues, especially that of the central government in Beijing, fell substantially and the government relied on a confused system of inventory taxes. Government revenues fell from 35% of GDP to 11% of GDP in the mid-1990s, excluding revenue from state-owned enterprises, with the central government's budget at just 3% of GDP.

2.

The reform and open-door policy of China began with the adoption of a new economic development strategy at the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party (CCPCC) in late 1978. Under the leadership of Deng Xiaoping, who had returned to the political arena after his three previous defeats, the Chinese government began to pursue an open-door policy, in which it adopted a stance to achieve economic growth through the active introduction of foreign capital and technology while maintaining its commitment to socialism.  The obvious aim of this policy shift was to rebuild its economy and society that were devastated by the Cultural Revolution. The policy shift also appears to have been prompted by recognition that the incomes of ordinary Chinese were so low, in comparison with incomes in other Asian economies, that the future of the Chinese state and the communist regime would be in jeopardy unless something was done to raise living standards of its people through economic growth.

The government subsequently established a number of areas for foreign investment, including the special economic zones, open coastal cities, the economic and technology development zones, the delta open zones, the peninsula open zones, the open border citiees, and the high-tech industry development zones. The establishment of these zones provided the trigger for massive inflows of foreign investment, primarily from companies in Hong Kong and Taiwan. At the same time, China promoted its socialist market economy concept. The changes brought an entrepreneurial boom that resulted in the emergence of huge numbers of entrepreneurs and venture businesses within China.   In 1998, per capita income, though still only about US$770, was 14 times higher than in 1980. Therefore, it seems reasonable to conclude that Deng Xiaoping's first goal, which was to improve the economic status of the people, has been accomplished.

Reforms were also implemented in urban industry to increase productivity. A dual-price system was introduced, in which (State-owned enterprise reform 1979) state-owned industries were allowed to sell any production above the plan quota, and commodities were sold at both plan and market prices, allowing citizens to avoid the shortages of the Maoist era. Moreover, the adoption of Industrial Responsibility System 1980s further promote the development of state-owned enterprise by allowing individuals or groups to manage the enterprise by contract. Private businesses were allowed to operate for the first time since the Communist takeover, and they gradually began to make up a greater percentage of industrial output.Price flexibility was also increased, expanding the service sector.

The government adopted more egalitarian and populist policies.It increased subsidies and control over the health care sector,halted privatization, and adopted a loose monetary policy, which led to the formation of a U.S.-style property bubble in which property prices tripled.^[48] The privileged state sector was the primary recipient of government investment, which under the new administration, promoted the rise of large "national champions" which could compete with large foreign corporations.

3.

Problems of Chinese Economic Growth

1. Pollution-Pollution is a major problem in many industrialised cities. Increased car ownership has led to problems of smog and worsening air quality.

  2. Shortage of Power-The growing demand from the Chinese economy has placed great demands on China’s creaking power infrastructure. This has led to the creation of projects like the Three Gorges Dam. This has been criticised for creating environmental and social problems

  

3. Growing Income Inequality-China’s economic growth has benefited the south and eastern regions more than anywhere else. This has created a growing disparity between north and south. The agricultural north has, by contrast, been left behind.

4. Unemployment-It sounds a paradox that the Chinese economy can grow at 8% and yet unemployment is still a problem. The reason is that there are still many state-owned enterprises which are grossly inefficient.