Challenges to China's Development

China has emerged as a world economic power in the last few decades. Using the sources in the list below, provide an overview of the rise of China and the issues that currently face China and are likely to face China in the near future.

Some useful key words to bear in mind:

• Compare and contrast
• Explain
• Analyse
• Relate
• Apply
• Theorise
• Hypothesise
• Predict
• Generalise
• Reflect

The red dragon rises: China’s soar from slumber to supremacy

Chris Jenks SID: 42070582

Introduction

The tale of China’s rise is a dramatic and fascinating story. While China has had one of the strongest and most advanced economies for the majority of the last two thousand years, it has gone through many ebbs and flows, trials and tragedies (Dahlman & Aubert, 2001). Recent years have arguably been the most dramatic: soaring from a low of poverty and economic stagnation less than 40 years ago, to becoming the second-biggest- and one of the fastest-growing economies (Hongbin, Lei, Binzhen, & Yanyan, 2012). This essay will set the scene with a very brief introduction to China’s economic history, before giving an overview of the rise of China in the last four decades (notably since the economic reforms on 1978) and the issues China faces both now and in the near future.

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China was the dominant economy in the year ca. 1200 AD, over the centuries it began lagging behind, by 1500 its per-capita GDP growth had slumped dramatically against Europe, and by 1800 its per-capita GDP was 2.5 per cent that of the USA (Zhu, 2012). In the 1950s-1960s, Mao Zedong’s capital-accumulation policy: the ‘Great Leap Forward’ attempted to launch China rapidly into economic prosperity through an artificially-induced industrial revolution which reduced food prices and diverted the majority of the people’s production into industrial development and infrastructure (Zhu, 2012). However, this move backfired by greatly reducing agricultural efficiently (cutting working incentives) and slashing public welfare (Zhu, 2012). When three years of drought and unfavourable weather struck in the late 1950s, the countries resources could not cope and it was plummeted into famine; by the late 1970s, China was one of the poorest countries in the world (Zhu, 2012).

However, Mao’s death 1976 bought change; in 1978 his successor Deng Xiaoping ushered in wide-sweeping economic and welfare reforms (Zhu, 2012). These reforms focused on the agricultural sector; the aggregate total factor productivity growth (or technological change) was arguably the most important factor, contributing 78 per cent of the per-capita GDP growth by increasing agricultural productivity (Zhu, 2012). Deng incentivised agricultural productivity further by increasing the state-controlled food prices and allowing farmers to trade any produce which was surplus to the state-imposed quotas at market prices (Zhu, 2012). This technological revolution and trade liberalisation allowed a much greater agricultural output per worker, making labour specialisation into more productive industries much more feasible (Zhu, 2012) resulting in a massive flow of workers away from agriculture and into other industries (Brandt & Zhu, 2010).

Inspired by the success of agricultural reforms, the central government then began the process of liberalising the non-state enterprise sector in much the same way it did agriculture, allowing the non-state entities to sell (and purchase) goods and services beyond their state-imposed quotas at market prices (Zhu, 2012). The state also allowed these non-state enterprises to enter industries formerly exclusive to state entities, and de-centralised control over both state and non-state entities, giving jurisdiction instead to local governments (Zhu, 2012). This had a great effect on non-state enterprises, lifting their employment share from 15 per cent in 1978 to 62 per cent in 2007, and their GDP share skyrocketing from 27 per cent in 1978 to 70 per cent in 2007 (Brandt & Zhu, 2010).

State enterprises however did not fare as well, despite being in protected industries and having free access to credit (unlike non-state enterprises), their GDP share dropped from 45 per cent in 1978 to only 20 per cent in 2007, and their employment share dropping 4 percentage points to 12 per cent in 2007, their productivity growing at only 1.68 per cent on average (cf. 3.91 per cent for non-state enterprises) over this time (Brandt & Zhu, 2010). This was mostly due to the restrictions that kept state enterprises from trading freely, and the fact the central government supported un-profitable state enterprises to promote social stability through job-preservation, however this caused many state enterprises to become uncompetitive and inefficient (Zhu, 2012) and the fiscal burden to keep them afloat resulted in massive inflation (Brandt & Zhu, 2000). In the mid-1990s it had become apparent this was unsustainable, and more economic reforms were implemented, many state enterprises were opened for privatisation and unprofitable enterprises were left to go bankrupt (Zhu, 2012).

When Jiang Zemin came to power in the mid­-1990s he brought in even more reforms as part of the goals to reach a “Xiaokang society (one that is comprehensively well-off)” (ChinaDaily, 2003). Jiang increased privatisation and trade liberalisation, between 1998 and 2007 productivity growth nearly doubled from 2.45 per cent to 4.68 per cent, and state enterprises finally began to experience growth (Brandt & Zhu, 2010). At the same time, the aggregate total factor productivity growth continued and resources were directed towards more profitable enterprises, manufacturing began to boom (Zhu, 2012). Despite this progress, service sectors remained under the tight control of central government and experienced hampered growth as a result (He, Zhang, Han, & Wu, 2014).

Future

Fast-growing economies cannot continue forever and eventually slow down, however China’s total factor productivity is currently only 13 per cent that of the USA, other advanced east-Asian economies did not experience any productivity slow down until it reached around 60 per cent of the USA (Zhu, 2012)

There are some major factors holding limiting China’s growth. The misallocation of resources in manufacturing limits total factor productivity by around 40 per cent (Hsieh & Klenow, 2009)

The central government faces the major challenge of enacting change while maintaining political stability over a huge and incredibly diverse state. While to date the majority of changes have been economic reforms, to keep politicians on side there has been little political reform which has been the source of much of China’s economic inefficiencies (Zhu, 2012). State-owned enterprises receive favourable treatment from the central government, having easy access to bank credit and are in protected industries. Despite non-state enterprises being responsible for 70 per cent of GDP and 62 per cent of employment (Brandt & Zhu, 2010), they receive a great deal less support and access to resources than state enterprises and local government entities do (Zhu, 2012)

(Hongbin et al., 2012)

• GDP is now almost 1/5 USA
• China’s productivity still 13% USA, plenty of room for productivity growth through economic reforms

(Unreferenced)

• However, rapid growth also severely impacted the country’s resources and environment and caused major social displacement
• China has a significant trade surplus with the United States, its most important export market

(Economy unreferenced)

• China’s economic system before the late-1990s, with state ownership of certain industries and central control over planning and the financial system, has enabled the government to mobilize whatever surplus was available and greatly increase the proportion of the national economic output devoted to investment.

(ChinaDaily, 2003)

• Jiang Zemin, Li Peng and Zhu Rongji led the nation in the 1990s. Under their administration, China’s economic performance pulled an estimated 150 million peasants out of poverty

(People’sDaily, 2000)

• and sustained an average annual gross domestic product growth rate of 11.2%

(UCLA)

• The Nationalist government’s retreat to Taipei Mao Zedong proclaiming the establishment of the PRC in 1949. Major combat in the Chinese Civil War ended in 1949 with the Communist Party in control of most of mainland China, and the Kuomintang retreating offshore, reducing the ROC’s territory to only Taiwan, Hainan, and their surrounding islands. On 1 October 1949, Communist Party Chairman Mao Zedong proclaimed the establishment of the People’s Republic of China.

(USSecretaryofDefense, 2013)

• China is a recognized nuclear weapons state and has the world’s largest standing army, with the second-largest defence budget

(Dahlman & Aubert, 2001)

• China had the largest and most complex economy in the world for most of the past two thousand years, during which it has seen cycles of prosperity and decline

Problems

(Zhu, 2012)

• The “reform without losers” policy causes state entities to continue to be inefficient and uncompetitive

References

Brandt, L., & Zhu, X. (2000). Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform. Journal of Political Economy, 108(2), 422-439.

Brandt, L., & Zhu, X. (2010). Accounting for China’s growth. Working Papers tecipa-394, University of Toronto, Department of Economics.

ChinaDaily. (2003). Nation bucks trend of global poverty. Retrieved 27th March, 2015

Dahlman, C. J., & Aubert, J.-E. (2001). China and the knowledge economy: Seizing the 21st century: World Bank Publications.

He, D., Zhang, W., Han, G., & Wu, T. (2014). Productivity Growth of the Nontradable Sectors in China. Review of Development Economics, 18(4), 655-666.

Hongbin, L., Lei, L., Binzhen, W., & Yanyan, X. (2012). The End of Cheap Chinese Labor. Journal of Economic Perspectives, 26(4), 57-74.

Hsieh, C.-T., & Klenow, P. (2009). Misallocation and Manufacturing TFP in China and India. The Quarterly journal of economics, 124(4), 1403-1448.

People’sDaily. (2000). China’s Average Economic Growth in 90s Ranked 1st in World Retrieved 27th March, 2015

UCLA. The Chinese people have stood up! Retrieved 27th March, 2015, from http://web.archive.org/web/20080206011617/http://www.international.ucla.edu/eas/documents/mao490921.htm

USSecretaryofDefense. (2013). Military and Security Developments Involving the People’s Republic of China 2013 In U. D. o. Defense (Ed.).

Zhu, X. (2012). Understanding China’s Growth: Past, Present, and Future. Journal of Economic Perspectives, 26(4), 103-124. doi: 10.1257/jep.26.4.103