Institutional Reforms and China’s Economic Growth

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Introduction

China falls in the category of the fastest emerging economies in the world. The country’s economic growth from 1949 rested on the government’s commitment to formulate and implement economic development policies (Bramall 2008).

During the period ranging from 1953 to 1978, China’s rate of economic growth was 4 per cent (Thomas 2006, p.3). However, from 1978 to present, the government started implementing policies aimed at transforming the domestic economy towards market-oriented (Chow 2004, p.127).

As a result, the country’s annual economic growth rate increased by a margin ranging between 8 per cent and 10 per cent. The growth hinged on the adoption of post-Mao economic reforms. In an effort to transform the economy, the Chinese government focused on a number of aspects one of them being undertaking institutional reforms.

According to Tisdell (2009, p.271), China has undertaken extraordinary institutional reforms since 1978. These reforms have proved to be highly effective in stimulating the country’s economic growth.

However, China faces an enormous task of maintaining the country’s rate of economic growth and development in the future.

This paper aims at providing clear evidence that institutional reforms (the transition from a central planning to a market economy) provide sufficient explanation for China’s fast rate of economic growth over the past three decades.

The paper also evaluates some of the issues that China has to do in order to maintain the country’s future economic growth and development.

Institutional reforms undertaken by China

From 1978, China initiated institutional reforms on a number of issues. Some of the main components of reform that the government focused on included agriculture, state-owned enterprises, international investment, the country’s price system, development of non-state sectors, the banking and financial sector, economic and social infrastructure, and social welfare (Tisdell 2009, p.276).

Reform on the agriculture sector

The Chinese government decided to initiate the institutional reforms by focusing on agriculture. This decision rested on the fact that agriculture was then the foundation of the Chinese economy (Tisdell 2009, p. 276).

In implementing agricultural reforms, more emphasis was paid on resource ownership, decentralisation, and the rule of law. The government introduced a system of farming known as the ‘household responsibility system’ to promote agricultural output.

The system was a shift from the previous collective farming. Through this system, each household owned land and was required to deliver a fixed amount of output to the government through the national procurement agencies.

In return, households would receive rewards for every additional output delivered (Chow 2004, p. 127). Implementing the ‘household responsibility system’ led to the Chinese farmers becoming richer which in turn improved their spending capacity.

Reforms within the agricultural sector set the foundation for undertaking reforms in other economic sectors. The reforms stimulated the Communist Party members to start supporting the market economy.

The institutional reforms undertaken within the agricultural sector will play a significant role in promoting the country’s economic growth, considering the fact that China has rich agricultural resources.

China’s agricultural resources have considerably enhanced the country’s competitive advantage with regard to attracting competitive advantage (World Trade Organisation, 2009, p. 41).

Transformation of state-owned enterprises

The Chinese government appreciated the importance of transforming state-owned enterprises from being state-controlled to being autonomous in a bid to stimulate the country’s economic growth by increasing production (Chow 2004, p. 130).

These reforms gave state-owned enterprises the discretion to formulate and implement their marketing, production, and investment decisions. Consequently, the output by state-owned enterprises increased significantly.

For example, by June 1990, 45 per cent of the total output from state-industrial enterprises was from state-owned enterprises, which had been granted autonomy in their operation.

The second type of reform entailed making the state-owned enterprises financially independent (Tisdell 2009, p. 276). The government achieved this goal by giving the enterprises an opportunity to reserve a certain proportion of their earnings after paying the corporate tax.

The enterprises could either use the reserves to motivate their employees by offering them better wages and salaries in addition to undertaking capital investment.

According to Gnos and Rochon (2009, p.243), better wages and salaries amongst employees stimulate a country’s rate of economic growth by increasing consumers’ purchasing power.

Institutional reforms on state-owned enterprises have also stimulated the country’s economic growth by promoting effective and efficient management and giving up control and ownership of some of the state-owned SMEs.

Managers and staff of the state-owned SMEs were given an opportunity to purchase shares thus giving them company ownership. Transformation of ownership of the state-owned enterprises led to capital infusion within the enterprises.

Adoption of the open-door policy

As an emerging country, China is increasingly becoming an investment destination with regard to Foreign Direct Investment (FDI) (Wu 2006, p.7).

A report by the World Trade Organisation (2009, p.41) revealed that China overtook the United States with regard to its capacity to attract new foreign direct investment.

One of the factors that have stimulated the rate of FDI in China relates to the adoption of the open-door policy. The policy aims at stimulating foreign investment and trade.

Initially, China operated a closed market economy, which substantially limited contribution of foreign trade to the country’s national income. In 1978, foreign trade in terms of imports and exports accounted for only 7 per cent of the country’s national income.

Upon opening the economy, the country managed to promote its exports. By 1987, the contribution of foreign trade on the country’s national income increased to 25 per cent and to 37 per cent of the country’s Gross National Product (GDP) by 1998 (Chow 2004, p. 131).

The government provided the various provinces with the independence of promoting their own exports in a bid to stimulate growth in the country’s exports.

This move led to the emergence of trading companies, which specifically dealt with production of export products (Chow 2004, p. 131).

The Chinese government also opened up the Shen-zhen economic zone to promote FDI. Consequently, Hong-Kong residents were presented with the opportunity of investing in China, which meant they could exploit the available skilled but inexpensive labour.

Within a period of one decade, Sheng-zhen metamorphosed to a modern city. After some time, the Chinese government considered opening up other economic zones in order to stimulate economic growth.

The adoption of the open-up policy has stimulated three main forms of FDI, viz. establishment of wholly owned FDIs, cooperative ventures, and jointly financed enterprises (Knight & Ding 2008).

Adoption of the open-door policy formed the basis of China’s ascend to the World Trade Organisation. Jensen and Weston (2006, p. 12) are of the opinion that the country’s ascension to the WTO forms the turning point for China with regard to its economic growth.

This aspect arises from the fact that WTO member countries have an opportunity of investing in China.

Reforms on pricing system

According to Arnold (2010, p.359), price is a key determinant in the economic growth of a particular country. A country can experience economic growth when the prevailing price level is falling, rising, or stable (Arnold, 2010, p. 359).

Kindleberger 2005, p.72) is of the opinion that adoption of price control policies can hinder a country’s economic growth by contracting free economic activity. Therefore, it is particularly crucial for the price level to be controlled by market forces.

For a considerable duration, the Chinese government controlled prices by administratively determining price levels. However, in an effort to stimulate the country’s economic growth, China gradually eliminated price controls.

Development of non-state sectors

Adoption of institutional reforms has also stimulated China’s economic growth by developing non-state sectors (Chow 2004, p. 135). Apart from state-owned enterprises, business enterprises in China fall into three main categories.

These include individual, collective, and overseas-funded. Overseas-funded enterprises entail enterprises, which were established due to adoption of the open-door policy.

The establishment of non-state owned enterprises has contributed significantly to China’s economic growth. Chow (2004, p. 135) asserts that China would continue to experience a rapid rate of economic growth in the event that state-owned enterprises fail to promote the country’s productivity.

The country’s economic growth would emanate from increased productivity of non-state owned enterprises, which form the largest proportion of the country’s business enterprises.

Therefore, one can attribute China’s economic growth over the past three decades to the institutional reforms undertaken.

Restructuring of the banking and financial sector

Prior to the adoption of the economic reforms, China only had one bank, viz. the People’s Bank. The bank’s functions were limited for it could only issue currency, take deposits, and advance credit to state-owned enterprises.

Loans advanced to state-owned enterprises were limited and could only be approved by a specific planning authority.

The country did not have commercial banks, which made it difficult for consumers and entrepreneurs to access credit facilities (Chow 2004, p. 138).

The People’s Bank underwent restructuring in 1983 and became the country’s Central Bank. The Chinese government established specialised banks such as the People’s Construction Bank of China, Agricultural Bank of China, and Industrial and Commercial Bank of China to increase credit availability to potential investors (Chow 2004, p.136).

The banks enjoyed the freedom of extending credit to customers. The reforms resulted in an increment in supply of currency within the country.

The government established the China International Trust and Investment Corporation (CITIC) to attract capital from foreign investors.

Other financial institution reforms that were undertaken include the establishment of the Shenzhen and Shanghai stock markets. The government also re-opened the country’s insurance business.

The financial reforms undertaken played a critical role in stimulating the country’s economic growth over the past two decades (Organisation for Economic Co-operation and Development 2008).

What needs to happen in order for growth and development to be maintained in future?

Over the past three decades, China has continuously implemented a number of market-oriented reforms. This aspect has allowed the country to become integrated into the global economy culminating in tremendous economic growth (International Economy 2012, p.9).

In addition to other institutional reforms undertaken, exports and investment have played a critical role in stimulating China’s economic growth. For example, adoption of investment-and-export-led economic growth model has been remarkably effective in stimulating job creation.

However, this model has resulted in the creation of various economic imbalances. Some of these imbalances relate to over-accumulation of foreign reserves and deficit in the current accounts (International Economy 2012, p.9).

Due to these imbalances, China has been inefficient with regard to resource allocation. Additionally, this aspect further threatens China’s ability to maintain its future economic growth and development.

Therefore, the Chinese government has to consider a number of issues to maintain the country’s economic growth. Firstly, the Chinese government should formulate policies aimed at stimulating domestic demand.

One of the ways through which this goal can be achieved is by accelerating reforms within the financial sector. The government should also improve the country’s social infrastructure.

In addition, the government should consider increasing public expenditure. Some of the expenditure items that China should consider relate to education, health, and social welfare.

This move will lead to reduction in consumer’s precautionary saving and consequently the country will transform into a consumption-driven economy.

Despite the financial reforms implemented, it is necessary for China to increase credit availability to households in addition to ensuring higher returns on household savings.

The Chinese government should also promote market economy where market forces determine the exchange rate.

Enhancement of free market economy is also crucial in China in order to sustain stability-oriented monetary policy. Implementation of these measures will enable China to become more sustainable with regard to its future economic growth.

Conclusion

From the analysis, it is evident that China’s economic growth over the past three decades lies in the institutional reforms that have been implemented over the years.

The institutional reforms have stimulated economic growth in different economic sectors. Additionally, the reforms have also led to increment in the rate of economic interaction between China and other economies.

However, China faces an enormous task of maintaining its future economic growth. The country’s future economic growth will only become sustainable if China stimulates domestic demand.

Reference List

Arnold, R 2010, Economics, Southwestern Cengage Learning, Mason.

Bramall, C 2008, Chinese economic development , Taylor & Francis, New York.

Chow, G 2004, ‘Economic reform and growth in China’, Annals of Economic and Finance, vol. 5, no. 1, pp. 127-152.

Gnos, C & Louis, R 2009, Employment, growth and development: A post Keynesian approach, Edward Elgar, Cheltenham.

International Economy, Can China become the world’s engine for growth?, 2012, viewed on<http://www.international-economy.com/TIE_W10_ChinaEngineGrowth.pdf>.

Jensen, L & Weston, T 2006, China transformations: The stories beyond the headlines, Rowman & Littlefield, Lanham.

Kindleberger, C 2005, Maniacs, panics , and crashes: A history of financial crisis, John Mueller, London.

Knight, J & Ding, S 2008, Why has China grown so fast? The role of structural change, University of Oxford, Oxford.

Organisation for Economic Co-operation and Development, 2008, OECD environmental outlook to 2030, OECD, Paris.

Thomas, S 2006, China’s economic development from 1860 to the present: The roles of sovereignty and the global economy, viewed on <http://www.forumonpublicpolicy.com/archive07/thomas.pdf>

Tisdell, C 2009, ‘Economic reform and openness in China: China’s development policies in the last 30 years’, Economic Analysis & Policy, vol. 39, issue 2, pp. 271-292.

World Trade Organisation, 2009, World Trade Organisation. US companies views on China’s implementation of foreign investment, Diane Publishing Company, London.

Wu, Y 2006, Economic growth, transition, and globalisation in China, Elgar, Cheltenham.

Click Here To Order Now!