Economics and Regional Planning

Subject: Economics
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The emergence of China from a sluggish Maoist economy to become the world’s fastest-growing developing country has been one the most outstanding phenomenon of the last half-century. The country’s rapid expansion has seen it leapfrog the established industrialized countries to become the second-largest economy after the United States exceeding $10 trillion dollars by 2005. China has also become the second-largest importing and exporting country with an average annual export growth of 4.5 percent and an annual growth rate in real Gross Domestic Product (GDP) averaging 10 percent between 1980 and 2000 (UNCTAD, 2005, 2004, 2003, and 2002). The robust export figures between 1985 and 2000 indicate that the country has been the main beneficiary of globalisation.

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China’s impressive growth statistics are, however fraught by the uneven pattern of its development, with the gap between the rich and poor widening as the latter’s purchasing power gets continuously eroded. Similarly, the country’s economic liberalisation is not matched in other areas of human rights and democracy as they continue recording less stellar performances in the tightly controlled administration (Reuters, 2008).

China’s first modern economic development model was initiated by the Communist regime in the early 1950s. this was based on the heavy industry-oriented development strategy (HIODS) that had three integrated aspects: a distorted macro-economic environment characterised by low interest rates, overrated exchanged rates, low nominal wages, and low consumer prices; secondly , a controlled credit allocation scheme, foreign exchange etc.; and traditional overbearing state enterprises and collective agriculture. These ingredients plus the Maoist ideology, and the Party experience in the revolution influenced the choice of the capital-intensive HIODS as the tool for development. The communist regime inherited a rural based agrarian economy with 85 percent of the population being rural based. They endeavoured to adopt a heavy industry based income as a symbol of development. This was more emphasized in the aftermath of the Korean War in 1950 as the country faced economic isolation. The success of the communist Soviet Union in the sector in the 1930s encouraged the Chinese authorities to adopt similar methods. HIODS strategies therefore become a priority in the country’s subsequent Five-Year Plans.

These capital intensive industries were characterised by long gestation periods, importation of complex technologies from the more developed countries and heavy financial investment. The country was, however, encumbered by the lack of these components as funds were scarce and the market interests elevated, foreign exchange was limited with lack of exports, and the country had minimal reserves due to its agricultural based economy. The Maoist regime therefore embarked on some artificial measures to stimulate the industrialization policies. This included low interest policy regime and overrated exchange rates aimed at reducing interest payments costs and technical equipment import costs, respectively. Other measures were minimal workers wages, pricing of raw materials, power, and transportation in the government economic growth strategy. These measures were directed at reserving surpluses to repay loans and for reinvestments as the communists ideologists distrusted private enterprise presumption of individual greed. Private firms were therefore nationalised with the state setting up other crucial corporations. The state provided the basic necessities including food and housing for the HIODS projects. However, these policies distorted the supply and demand for credit, foreign exchange, raw materials, and other essentials. The state resulted in price controls as the market forces got erratic and administrative measures were adopted in the allocation of finance, goods, trading items, and the control of all distribution channels. Market competition was therefore discouraged hence eradicating profits as measures of growth. The state corporations were micromanaged in both their inputs and outputs, with even the price of their products being set by the state. The corporations’ revenues were also controlled through the government budgets, and they therefore became an extension of the state in most forms and practices. The lack of autonomy stifled any entrepreneur spirit and the corporations had no enthusiasm for growth within the confines of their mandates.

This state of affairs was also extended to the agricultural sectors. The government strategy of acquiring cheap food and other farm products led to the control of all farming activities in China. The farmers were forced to sell fixed quota of their produce at set prices. The agricultural sector was also the main foreign exchange earner for the country, accounting for over 40 percent in exports in the 1950s and 60 percent with the inclusion of processed farming products up the 1970s. The HIODS project was also dependent on agricultural performance. Even with this heavy dependence on agriculture, the state was not keen on diverting from the HIODS hence the government developed a development strategy which was not challenging the HIODS initiative. This labour intensive strategy called for mass mobilization of rural workers into state farm projects, e.g., irrigation, flood management, land reclamation etc. The state farms were mandated to raise more unit yields even with the use of non-mechanised traditional methods. This collectivisation was aimed at affecting the state low-input high yield success through close control. However, they were bound to fail as supervising a farmer is curtailed by space and time (Lin, J, Cai, F, & Li, Z 1996).

According to Lin et al (1996), the distorted macro-economic policy, deliberate allotment system, and the micro-managing of institutions with a singular intention of mobilisation of all assets towards the HIODS project was biased (Lin, J, Cai, F, & Li, Z 1996). Although agriculture accounted for over 80 percent of the population was engaged in this sector, the government always allocated less than 10 percent of its budget to the sector while diverting 45 percent to HIODS. This deliberate investment led to a growth of 15 to 40 percent from 1952 to 1970s. This government planned course towards heavy industry was successful albeit at heavy price to human resource and resulting in an inefficient due to lack of market-oriented forces and labour intensive low technical efficient due to the nature of labour control without accompanying incentives. This eventually led to stagnation in the productivity growing by only 0.5 percent between 1957 and1981 (World Bank, 1985).

The Transition

China’s transformation into a modern market economy was a logical process guided by the state administration without following a set blueprint but rather through gradual reforms. The government had initiated piecemeal reforms before the 1970s by decentralising the allocation mechanism but were still tightly controlled by the state. According to Lin et al (1996), the turnaround from the strict Maoist socialist program was achieved when the state-controlled farms initially micro-managed were gradually freed as the farmers, managers, and workers were partially given control (Lin, J, Cai, F, & Li, Z, 1996). Fernández-Jilberto & Hogenboom (2007) argue that China’s transition from socialist to capitalist economy started in the late 1970s was done in two phases: first phase in 1978 to 1984 and the current phase from 1984 to the 21st century (Fernández-Jilberto, A. E. & Hogenboom, B. 2007).

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The economic reforms of the first phase (1978-84) emphasized agrarian reorganization to enhance the efficiency and value of the sector, encourage expenditure , development of domestic industries, and induce market reforms projected at reducing economic gap inequalities between the rural and urban populations. The second phase initiated in 1984 was designed to reduce the inflationary crisis and establishment of social stability to counter the impact of reforms started in the early 1980s. The government debated on whether to radically reform the property ownership structure and entire privatization of state corporations or alternatively implement the structural adjustment programs (SAPs) as advocated by the IMF/World Bank. The Chinese government decided to adopt the structural adjustment policies whereby the state monetary strategies become the focal mechanism of influencing currency rates, and the state fixed price regime was partially relaxed to enhance the competitiveness of its export products. This model pricing policy ensured that the government, while still maintaining a fixed price on capital goods left the pricing of consumer products to the forces of the market. This model had some shortcomings as errant corrupt state officials took advantage of the system to accumulate personal funds and reward their cronies. Additionally, the government objective of bridging the income inequality gaps were not realised as there emerged two social groups of the state controlled pricing system and the market controlled pricing group. This led to the government ditching of the pricing policy in 1988 and consequent further economic liberalisation and deregulation (Li, 1997).

Entry into the World Trade Organization (WTO)

The entry and subsequent signing of China into the World Trade Organization (WTO) in 2001 strengthened its resolve to economic non-interventionist policies. The government removed trade barriers and protectionist policies with gradual reduction of import duties from 43 percent in 1992 to 17 percent by 2002(Lemoine, 2002). According to Fernández-Jilberto & Hogenboom (2007), ‘reductions were accompanied by the parallel application of selective protectionism with more rights of importation, licences, and quota regimes in the sectors considered as strategic’ (Fernández-Jilberto, A. E. & Hogenboom, B. 2007). Although allocations and authorization for manufacturing goods imports were reduced, some partial quotas were upheld for the importation of agricultural goods. In the service industry sectors, the government also allowed foreign enterprises to be set up in a limited way, unlike in the transportation sector. In this sector, multinational corporations were allowed to take part in both wholesale and retail enterprises, and they were also authorised to trade in local and imported goods. The entry into the WTO also greatly benefited China from 2005 as European and American markets reduced or eliminated their import quotas against Chinese goods. The flooding of cheap Chinese products in these markets has however seen a gradual reversal and tightening of the import quotas by these countries (Fernández-Jilberto, A. E. & Hogenboom, 2007).

Opening up of China to Foreign Investors

Another major stimulus to export growth was the liberalisation of the export sector. Imports on products projected for subsequent re-exportation were relaxed, mostly in the industrial assembly products. This led to the emergence of the Eastern coastal ‘industrial belt’ that opened up China to international trade based on contracting from multinationals corporations who set up assembly line industries in the coastal areas. American, European and Japanese multinational corporations are the major industries operating off the coastline of China, generally producing a bulk of inexpensive goods and products. This arrangement benefits the large foreign companies who include retailers, in terms of cheap Chinese labour while providing employment for China’s large (800 million) labour force. Approximately 60 percent of Chinese foreign exports are controlled by these multinationals, with a greater share or proportion in the computer parts and household consumer electronics (Barbosa 2006).

This development has assisted China in gaining some estimated $465 billion dollars in foreign direct investment (FDI) flow into the economy between 1995 and 2004 hence making the country the third-largest recipient of FDI after United States and Britain. The World Bank credits the development in the investment environment to the doubling of private enterprise share of GDP in China (World Bank, 2005).

Liberalisation and Private Enterprise

The contribution of internal dynamics in the economic development and growth in the face of the government adoption of liberal policies is also of major significance. The stagnation of the state-sponsored enterprises and the rapid ascent of the autonomous township and village enterprises (TVEs) led to the government adoption of liberal measures aimed at making the state corporations economically self-sufficient. These rural industries were constrained by their lack of credit, production inputs monopolised by state enterprises and markets for their products. With reforms, there were new injections of surpluses as the rural farmers become more efficient with autonomy. The easing of rigid excess to raw materials and markets ensured that the TVEs were able to operate without any constraints. Between 1981 and 1991 TVEs grew by 26 percent, employment rose by 11.2 percent, and the private output vale expanded by an average of 29.6 percent. The TVEs expansion was three times that of the state corporations within the same period, and by 1993, TVEs contributed 38.1 percent of the total industrial production in China. The total private industry production increased from 22 percent in 1978 to a high of 56.9 percent by 1993(China’s State Statistical Bureau, 1995).

The explosion of private enterprise in China’s economy, as exemplified by the autonomous township and village enterprises (TVEs) induced two unanticipated reforms in the country. The first change was in that the private industry provided the markets for various products. They were forced to operate in a free-market environment as they searched for raw materials while competing for similar products with others in the same category. Similarly, when marketing their goods, they were also in competition with other products hence leading to more efficient methods in production and quality goods. Without state subsidy, their employees were not encouraged to slacking tendencies as they could be sacked. This dynamism promoted the state enterprises to adopt similar market oriented methods, and they were given autonomy to engage their own reforms. Another unexpected reform induced by the private industry phenomenon, was the prudent allocation of resources. The use of market prices to determine demand and supply forced the private enterprises to adopt labor intensive methods of production in their small enterprises. Thus their entry into China’s economic sphere reduced the impact of previous HIODS centered policies (Lin, J, Cai, F, & Li, Z 1996).

Socialist Market Economy

China’s economic reform is remarkable in that it was fuelled and managed by a ‘Marxist’ or Maoist government induced reforms. According to Fernández-Jilberto & Hogenboom (2007), these reforms did not result in a weakening of state machinery and unfortunately minimal democratization or an end to the government leftist socialist ideologies (Fernández-Jilberto, A. E. & Hogenboom, B. 2007). Chen (1997) traces the origins of the miraculous transformation to the ascendancy of the moderate Chinese leader, Deng Xiaoping in 1979. He argues that the exit of the hawkish left-wing Marxist who had reigned over China since the 1950s heralded the economic reforms propagated by Deng Xiaoping (Cheng, Chu-Yuan, 1997).

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These economic reforms were later to be defined in 1992 as “Socialist Market Economy”, with the accepted idea by the communist leaders that some positive measures from Capitalism could be incorporated in the socialist fold if able to improve collective output and living standards. The government’s successful implementation of economic reforms have enhanced its position and brought political stability to the state. Despite the blight of the Tiananmen protests of 1989 and the Tibetan drive for political freedom and autonomy, China has remarkably maintained a stable political environment with emerging prosperous urban elite. This can be contrasted to the transition in the former socialist Soviet republics of Eastern Europe who continues to experience political, economic and social strife as they try to integrate into modern capitalist states. Their problems when contrasted with China’s stability are sometimes traced to their ‘shock therapy’ or wholesale adoption of the unfamiliar Western capitalist system that has brought economic instability and social woes (Adams, F. Gerald 1993).

Globalization has adversely affected developing countries as they are forced to compete on ‘equal terms’ with the established industrialized countries in the world markets. China however has blossomed in this environment as the country’s large labor force of 800 million workers provide a cutting edge advantage to the country’s labor intensive industries. Fernández-Jilberto & Hogenboom (2007), argue that globalization has rather strengthened the Chinese economy as it embarks on specialisation in key sectors where it enjoys crucial competitive virtual advantages(Fernández-Jilberto, A. E. & Hogenboom, B. 2007).This is typified by the textile industry, which tends to be labour intensive. China has dominated the sector occupying 40 percent of the global clothing market by producing intermediary materials (fibres and fabrics) and the end materials (cloths). This forms a crucial outlet for its huge labour force.

Problems and Challenges

Even with all this comparative advantage, China is also faced with great challenges, chief among them being the employment of its workers. Although official figures give unemployment of 3.5 percent, economic indicators give a more realistic figure of 10 percent or more, translating to approximately more than 10 million people being unemployed. The restructuring of the agricultural sector into more modern methods will further add to the unemployed records. It is further estimated that within ten years, 130 million people will be released in the job market due to population growth. The rural-urban economic and social divide is also widening even with the country enjoying an economic boom. The western remote and undeveloped regions continue to lag behind the more prosperous eastern costal and urban regions (e.g., Shanghai and Beijing as compared to the Guizhou province) hence exposing the country to dangerous imbalances (Reuters, 2008).

Another glaring problem faced by China is the lack of parallel political reform to complete the reform agenda. The lack of political and social freedom is still an indictment on the Chinese leaders intorerance of descent and the general lack of democractic practices. This is evident in the control extended to the internet, media, religious suppression and lack of choice in electing prefered leaders. China has also been accused of perpetuating dictatorial rogue regimes in its insatiable hunger for raw materials like energy, minerals and pursuit of markets for its products. In Sudan, despite large-scale condemnation, China has continued to support the current regime even as it continues to suppress its population in Darfur. The country policy has been “trade-not-aid”, with a fundamental purpose policy of securing its access to the raw materials and goods essential to uphold the vitality of its economy, while opening up its domestic market as an export destination to the industrialised countries.


Although China lacked a blueprint for its remarkable economic transformation, the country has successfully converted its agrarian based economy to become the world’s fastest-growing industrialized developing country. The turning point was in the reforms initiated from 1978 by the moderate Chinese leader Deng Xiaoping. The gradual transformation from the heavy industry focal point of HIODs to the market based capitalist leaning model of private enterprise has made the country enjoy a sustained growth under the firm leadership or control by the socialist leaders without undergoing upheavals as experienced in most developing countries. China has continued to thrive even with the advent of globalization which has been a boon for its emerging industries.

The major challenge facing the country is to sustain the growth in view of the current financial crisis and credit crunch experienced in its major markets of Europe and America. The other challenge is dealing with the inequalities experienced even with the tremendous economic growth. A report by China Institute for Reform and Development and other research institutes indicate low Human development levels (HDI) for the country with the fastest-growing economy ranking it at number 81 in the world. This income gap between rich and poor is dissuading consumption and dragging down productivity. The Chinese leadership is however, initiating measures to curb the inequalities by offering inducements to foreign and domestic firms setting up in the largely undeveloped western region of the country, among other measures. China has therefore successfully combined a market oriented transformation while maintain its public ownership control system with enviable success and hence has emerged as the economic miracle of the 21st century.


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