Economic Reform in China

Economic Analysis & Application

An Essay on

Economic Reform in China

Name: Stewart Miles

Submitted To: Dr. Edison XY

Submitted Date: 22 June 2020

Capital Normal University

     Economic Reforms in China

Abstract

  Last December marked the 40th anniversary of China’s reform and opening-up policy, which was launched under the leadership of Deng Xiaoping at the 1978 Third Plenum. This policy jump-started China’s transformation from a poor and underdeveloped centrally-planned economy into an economic powerhouse, increasingly driven by the market. In 2018, China’s economy grew at the slowest rate since 1990, and the country became embroiled in a trade war with the US. At the same time, the economy has developed to a point where its established growth model is no longer tenable. China’s reform and opening-up policies introduced private business and market incentives to what was a state-led communist system. Prior to 1978, the private sector was virtually non-existent; today, private firms contribute to approximately 70 percent of China’s GDP. In this respect, China’s development and reform path is unique, with it sometimes being referred to as the ‘China Model’ of development. To this day, it is debated whether China developed because of the continued role of the state in its economy or despite it. China is now the second largest economy in the world behind the US and is figures among the World Bank’s Middle-Income Countries (MICs) based upon GNI per capita. This paper applies a systems-oriented, “holistic” approach to China’s radical economic reforms during the last quarter of a century. It characterizes China’s economic reforms in terms of a multidimensional classification of economic systems. When looking at the economic consequences of China’s change of economic system, I deal with both the impressive growth performance and its economic costs. In this paper I also study the consequences of the economic reforms in china and what’s the reason of success behind Chinese economic.

                                                                                     Introduction

The reforms were started by reformists within the Communist Party of China—led by Deng Xiaoping—on December 18, 1978, during the "Boluan Fanzheng" period. The reforms went into stagnation after the 1989 Tiananmen Square protests, but was revived after Deng Xiaoping's Southern Tour in 1992. In 2010, China overtook Japan as the world's second-largest economy. 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. This placed it near the middle of the Asian nations during the same period, with neighboring capitalist countries such as Japan, South Korea and rival Chiang Kai-shek's Republic of China outstripping the PRC's rate of growth. Starting in 1970, the economy entered into a period of stagnation, and after the death of Mao Zedong, the Communist Party leadership turned to market-oriented reforms to salvage the failing economy. The Communist Party authorities carried out the market reforms in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, most industry remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. The private sector grew remarkably, accounting for as much as 70 percent of China's gross domestic product by 2005. From 1978 until 2013, unprecedented growth occurred, with the economy increasing by 9.5% a year. The conservative Hu Jintao's administration regulated and controlled the economy more heavily after 2005, reversing some reforms. On the other hand, a parallel set of political reforms were launched by Deng in 1980, but eventually ended in 1989 due to the Tiananmen Square protests. The success of China's economic policies and the manner of their implementation resulted in immense changes in Chinese society in the last 40 years, including greatly decreased poverty while both average incomes and income inequality have increased, leading to a backlash led by the New Left. In the academic scene, scholars have debated the reason for the success of the Chinese "dual-track" economy, and have compared it to attempts to reform socialism in the Eastern Bloc and the Soviet Union; as well as to the growth of other developing economies. Additionally, these series of reforms have led to China's rise as a world power and a shift of international geopolitical interests in favour of it over Taiwan. The reform era has been said to end during the leadership of Xi Jinping, who generally opposes the reforms and has rolled back many of the Deng-era reforms as the Communist Party reasserts control over different aspects of Chinese society, including the economy. In 2018, China expert Minxin Pei has argued that the Chinese economy is currently the least open since the reform era began in the 1980s. This de-liberalization is seen by one Hong Kong commentator as part of the subject of the present US-China trade war, in which the United States alleges the Chinese government is giving unfair and discriminatory competitive advantages to Chinese state-owned and private companies.

                                                                                  Course of Reforms

Economic reforms began during the "Boluan Fanzheng" period, especially after Deng Xiaoping and his reformist allies ousted the Gang of Four Maoist faction with Deng replacing Hua Guofeng as the paramount leader of China in December 1978. By the time Deng took power, there was widespread support among the elite for economic reforms. As the de facto leader, Deng's policies faced opposition from party conservatives but were extremely successful in increasing the country's wealth.

• 2005–2012 Hu Jintao and his conservative administration began to reverse some of Deng Xiaoping's reforms in 2005. Observers note that 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. 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.

• 2012–present Under Party general secretary Xi Jinping and his administration, the Communist Party of China have sought to increase its control over state-owned and private enterprises. At least 288 firms have revised their corporate charters to allow the Communist Party greater influence in corporate management, and to reflect the party line. This trend also includes Hong Kong-listed firms, who have traditionally downplayed their party links but are now "redrafting bylaws to formally establish party committees that previously existed only at the group level.

                                                          Economic Performance Since Reform   

China's economic growth since the reform has been very rapid, exceeding the East Asian Tigers. Since the beginning of Deng Xiaoping's reforms, China's GDP has risen tenfold. The increase in total factor productivity (TFP) was the most important factor, with productivity accounting for 40.1% of the GDP increase, compared with a decline of 13.2% for the period 1957 to 1978—the height of Maoist policies. For the period 1978–2005, Chinese GDP per capita increased from 2.7% to 15.7% of U.S. GDP per capita, and from 53.7% to 188.5% of Indian GDP per capita. Per capita incomes grew at 6.6% a year. Average wages rose six-fold between 1978 and 2005, while absolute poverty declined from 41% of the population to 5% from 1978 to 2001. Some scholars believed that China's economic growth has been understated, due to large sectors of the economy not being counted.

• Impact on world growth China is widely seen as an engine of the world and regional growth. Surges in Chinese demand account for 50, 44, and 66 percent of export growth of the Hong Kong SAR of China, Japan and Taiwan respectively, and China's trade deficit with the rest of East Asia helped to revive the economies.

Reforms in Specific Sectors

Trade and foreign investment Some scholars assert that China has maintained a high degree of openness that is unusual among the other large and populous nations, with competition from foreign goods in almost every sector of the economy. Foreign investment helped to greatly increase quality, knowledge and standards, especially in heavy industry. China's experience supports the assertion that globalization greatly increases wealth for poor countries. Throughout the reform period, the government reduced tariffs and other trade barriers, with the overall tariff rate falling from 56% to 15%. By 2001, less than 40% of imports were subject to tariffs and only 9 percent of import were subject to licensing and import quotas. Even during the early reform era, protectionist policies were often circumvented by smuggling. When China joined the WTO, it agreed to considerably harsher conditions than other developing countries. Trade has increased from under 10% of GDP to 64% of GDP over the same period. China is considered the most open large country; by 2005, China's average statutory tariff on industrial products was 8.9%. The average was 30.9% for Argentina, 27.0% for Brazil, 32.4% for India, and 36.9% for Indonesia. China's trade surplus is considered by some in the United states as threatening American jobs. In the 2000s, the Bush administration pursued protectionist policies such as tariffs and quotas to limit the import of Chinese goods. Some scholars argue that China's growing trade surplus is the result of industries in more developed Asian countries moving to China, and not a new phenomenon. China's trade policy, which allows producers to avoid paying the Value Added Tax (VAT) for exports and undervaluation of the currency since 2002, has resulted in an overdeveloped export sector and distortion of the economy overall, a result that could hamper future growth.  Foreign investment was also liberalized upon Deng's ascension. Special Economics Zone (SEZs) were created in the early 1980s to attract foreign capital by exempting them from taxes and regulations. This experiment was successful and SEZs were expanded to cover the whole Chinese coast. Although FDI fell briefly after the 1989 student protests, it increased again to 160 billion by 2004.

         Challenges and Further Reforms

Despite the successes of the Chinese economy, in recent years, it has shown vulnerabilities and entered a critical stage for its continued development and reform.  Economic growth has slowed from the previous double-digit rates, with this being described as the ‘new normal’ as the country’s economy becomes more mature. In 2018, China’s GDP grew by 6.6 percent, according to official statistics, and the leadership in Beijing has lowered the growth target to 6-6.5 percent for 2019. Many economists argue that actual growth is significantly lower than these official figures. Economists from both inside and outside of China have called for the country’s leaders to adopt structural reforms. so that it can continue to develop and avoid the dreaded ‘middle-income trap’. At the 2013 Third Plenum, 35 years after the launch of Deng’s reforms, the Communist Party under the leadership of President Xi Jinping made a decisive commitment to further reforms. At the plenum, a 60-point plan entitled “The Decision on Major Issues Concerning Comprehensively Deepening Reforms” was released. One of the key decisions pledged to “allow the market to play a decisive role in resource allocation”, which appeared to signal a preference for market-based measures.

                                                       Reasons for Success                                               Scholars have proposed a number of theories to explain the success of China's economic reforms in its move from a planned economy to a socialist market economy despite unfavorable factors such as the troublesome legacies of socialism, considerable erosion of the work ethic, decades of anti-market propaganda, and the "lost generation" whose education disintegrated amid the disruption of the Cultural Revolution.  One notable theory is that decentralization of state authority allowed local leaders to experiment with various ways to privatize the state sector and energize the economy. Although Deng was not the originator of many of the reforms, he gave approval to them. Another theory focuses on internal incentives within the Chinese government, in which officials presiding over areas of high economic growth were more likely to be promoted. Scholars have noted that local and provincial governments in China were "hungry for investment" and competed to reduce regulations and barriers to investment to boost economic growth and the officials' own careers. A third explanation believes that the success of the reformists is attributable to Deng's cultivation of his own followers in the government. Herman Kahn explained the rise of Asian economic power saying the Confucian ethic was playing a "similar but more spectacular role in the modernization of East Asia than the Protestant ethic played in Europe". China's success is also due to the export-led growth strategy used successfully by the Four Asian Tigers beginning with Japan in the 1960s–1970s and other newly industrialized countries.  The collapse of the Soviet Bloc and centrally planned economies in 1989 provided renewed impetus for China to further reform its economy through different policies in order to avoid a similar fate. China also wanted to avoid the Russian ad-hoc experiments with market capitalism under Boris Yeltsin resulting in the rise of powerful oligarchs, corruption, and the loss of state revenue which exacerbated economic disparity.  

                 

Comparison With Other Developing Economies

China's transition from a planned economy to a socialist market economy has often been compared with economies in Eastern Europe that are undergoing a similar transition. China's performance has been praised for avoiding the major shocks and inflation that plagued the Eastern Bloc. The Eastern bloc economies saw declines of 13% to 65% in GDP at the beginning of reforms, while Chinese growth has been very strong since the beginning of reform. China also managed to avoid the hyperinflation of 200 to 1,000% that Eastern Europe experienced. This success is attributed to the gradualist and decentralized approach of the Chinese government, which allowed market institutions to develop to the point where they could replace state planning. This contrasts with the "big bang" approach of Eastern Europe, where the state-owned sector was rapidly privatized with employee buyouts, but retained much of the earlier, inefficient management. Other factors thought to account for the differences are the greater urbanization of the CIS economies and differences in social welfare and other institutions. Another argument is that, in the Eastern European economies, political change is sometimes seen to have made gradualist reforms impossible, so the shocks and inflation were unavoidable. China's economic growth has been compared with other developing countries, such as Brazil, Mexico, and India. GDP growth in China outstrips all other developing countries, with only India after 1990 coming close to China's experience. Scholars believe that high rates of investments, especially increases in capital invested per worker, have contributed to China's superior economic performance. China's relatively free economy, with less government intervention and regulation, is cited by scholars as an important factor in China's superior performance compared to other developing countries.

                                                                                      Legacy and Criticism                                                                                     The government retains monopolies in several sectors, such as petroleum and banking. The recent reversal of some reforms has left some observers dubbing 2008 the "third anniversary of the end of reforms". Nevertheless, observers who? believe that China's economy can continue growing at rates of 6–8 percent until 2025 though a reduction in state intervention is considered by some to be necessary for sustained growth. Despite reducing poverty and increasing China's wealth, Deng's reforms have been criticized by the Chinese New Left for increasing inequality and allowing private entrepreneurs to purchase state assets at reduced prices. These accusations were especially intense during the Lang-Gu dispute, in which New Left academic Larry Lang accused entrepreneur Gu Sujung of usurping state assets, after which Gu was imprisoned. The Hu-Wen Administration adopted some New Left policies, such as halting privatizations and increasing the state sector's importance in the economy, and Keynesian policies that have been criticized by some Chinese economists who advocate a policy of deregulation, tax cuts and privatization. Other criticisms focus on the effects of rapid industrialization on public health and the environment. However, scholars believe that public health issues are unlikely to become major obstacles to the growth of China's economy during the coming decades, and studies have shown that air quality and other environmental measures in China are better than those in developed countries, such as the United States and Japan, at the same level of development

                                                                                        Conclusion                                                                                           The economic reforms have increased inequality dramatically within China. Despite rapid economic growth which has virtually eliminated poverty in urban China and reduced it greatly in rural regions and the fact that living standards for everyone in China have drastically increased in comparison to the pre-reform era, the Gini coefficient of China is estimated to be above 0.45, comparable to some Latin American countries and the United States.  Increased inequality is attributed to the disappearance of the welfare state and differences between coastal and interior provinces, the latter being burdened by a larger state sector. Some Western scholars have suggested that reviving the welfare state and instituting a re-distributive income tax system is needed to relieve inequality, while some Chinese economists have suggested that privatizing state monopolies and distributing the proceeds to the population can reduce inequality.

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