China boasts of being the third-largest economy around the world following the United States and Japan and has a gross domestic product of US$ 3.7 trillion in this year’s statistics which are attributed to the exchange rate terms. China is also placed a strong number two in economic prowess when statistics are based on the purchasing power parity. China’s economy is the fastest-growing in the world and this has also benefited the global economy’s growth since the year 2007. The economy is also enjoying an 8% growth annually in per capita income (Wilson, 2003).
This trend of the economy has greatly reduced the poverty levels and has improved the citizens’ living conditions and welfare. However, this economic growth has also brought about rising levels of income inequality with the poor having little growth while the richer having a wider margin of growth in economic terms. Most of these significant attributes of the Chinese economy can be rooted in the 1970s Chinese reforms on free trade (Chen, 1996).
Economic history of China
For most of the recorded history of the world, China has been the largest economy and was also the technology leader in the world. This information can be verified by a number of reputable sources based in Western countries and Indian sources as well can verify that. Records show that China has been the global economic leader for eighteen centuries of the last twenty centuries that have been recorded by historical records. It is also recorded that the country’s income per capita was the highest in the world until the fifteenth century. Early in the 19th Century, the country’s economy accounted for more than 30% of the world economy (Wen, 2001).
However, not more than a hundred years had passed since the early 19th century than the table had turned against the giant economy that China once was. Around this time, China’s economy only accounted for a mere 9% of the world economy and this downfall is rooted in the industrial revolution of the nineteenth century which acted as a fortune for Europe and later for the United States. It is believed that this revolution bypassed China and was only highly active in Europe (Teiwes, 1998).
Between the years 1875 and 1915 the United States had overtaken China in economic prowess and China was experiencing a steady economic deterioration. This situation worsened with the fall of the Qing Dynasty and the country was involved in chaos after the fall acted as a catalyst for the country’s short and quick economic deterioration especially when compared to other countries like the United Kingdom and the United States. The situation was so bad that by the year 1900, the Chinese GDP was only half of that of the United States of America. This trend would continue with the Chinese economy facing major challenges and by the year 1925 the country’s GDP was only 20% of that of the United States and in the year 1950, it was only 10% of that of the United States (Cannon, 2000).
In the years between 1950 and 1975 China’s economy was still a small shadow of the enormous American economy and it was still estimated at around 10% of that of the United States. However, the decline reduced significantly when Mao’s reforms on collectivization helped in arresting the country’s decline in the economy. But then a lot of damage had been done and China was no longer the leading economy in the Asian region and the leading economy was by then Japan which would hold this position up to today (Yabuki, 1995).
In the years between 1975 and 2000, United States was still the world’s leading economy followed by Japan, Germany, and China was placed fourth in the world economy. Its Asian influence had also been taken by Japan which was now the leading economy in the Asian economy. Even at that time, the Chinese GDP was still estimated to be a weak 10% of the enormous economy of the United States. To counter this state of affairs, the Chinese leader Deng Xiaoping changed the economy’s outlook to that which was oriented on exports and expansion of the exports. This laid a solid foundation for the Chinese economy’s grand comeback to be an influential economy in the world (Schlevogt, 2001).
From the year 2000 to the present, the economy of China has been increasing to great degrees though some economists have argued that the growth comes with a much higher cost. There is also concern that the economy is subjecting the environment to the pollution which mostly is as a result of an overheated economy. There is also concern that the economic growth is too costly for the poor living in rural because the income inequality gap is increasing day by day and this has prompted the Chinese president Hu Jintao to act on these concerns and has stated that the progress of the economy will not only be measured using the GDP but also through social surveys (Logan, 1998).
Reason for China’s rapid economic growth
The Chinese government initiated an economic reform during the year 1978. This came after decades of the government controlling all the assets and resources in the country. The government had the vision of awakening a slumbering economic giant and thus the government came up with policies that encouraged private investment in business and rural enterprises formation. The government also came up with policies of a liberalized market that encouraged foreign investors and foreign trade. The state also relaxed its price control policies in some sectors and invested heavily in its industrial sector. The government also noted that education was a key factor in the economic growth of any country and hence it invested in the education of its labor force. This is one of the reasons that the economy of China is growing at such strengths and this strategy of the government can be said to be superbly working out (Chen, 1996).
Before the year 1978, China’s economic growth was averaged at only 6% with heavy toils in some years. After 1978, China’s economic growth has been averaged at a higher than 9% growth rate with fewer toils along the way and in fact, there has been a record 13% economic growth in several years that can only be termed as peak years. During the last fifteen years, the per capita income has increased in amazing margins and economic analysts are foreseeing that the Chinese economy is capable of overtaking the American economy in about twenty years’ time. That kind of growth can only be compared to that of the Asian Tigers which include Singapore, Hong Kong, Taiwan Province of China, and Korea; these countries have a group average of over 7% growth rate in a century and a half (Hornik, 1995).
Experts from International Monetary Fund tried to examine why the country was having such rapid economic growth and they found out that the country has accumulated a lot of capital assets which include manufacturing machinery, factories, and a state of the art communications systems. The Chinese population has also been a key factor in the rapid growth because of the increased number of workers in the country. The country has also maintained a steady increase in productivity due to a factor known as the efficiency of the workers. Between the years 1979 and 1994 more than 40% of the country’s growth was attributed to improved productivity and this improved productivity overtook capital as the paramount source of the growth of the country’s economy in the 1990s. This also proves wrong the traditional economic theories that were for the accumulation of capital assets supporting the growth of an economy. This increased productivity can be rooted in the government reforms of the economy which were initiated in the late 1970s (Peng, 1999).
Before the economic reforms, most of the Chinese were involved in agriculture but after the reforms, few people were involved in agriculture. This is because the reforms came up with policies that encouraged and expanded rights to property in the countryside and this formed a basis for the citizens to compete in establishing businesses in the rural areas which were not based on agriculture. There was also the concept of decollectivization and the introduction of high agricultural products prices which led to increased domestic production in the country. This also prompted the citizens to employ labor efficiently in their economic activities. These forces acted as a catalyst for the moving of many workers from the agricultural sector to other economic sectors. The growing domestic businesses located in the rural had driven multitudes of citizens from agriculture to other more profitable manufacturing (Fan, 2002).
In addition, the economic reforms also afforded higher autonomy to managers of the enterprises. This meant that the managers had the right to make out their own targets in production, hire and fire their workers who proved to be worth hiring or firing, and sell their products to the competitive private sector where prices were better. They also had the right to save some of their income for investing in the future. The overall effect was that the private sector flourished and there was noted improved productivity and there was the creation of numerous jobs by the private sector. The private sector was also involved in international trade and hence the managers earned foreign currency through international trade. The reforms helped in ensuring that the private enterprises paid their taxes and also afforded the economy something that it had never before experienced, resiliency and flexibility(Naughton, 1997).
China has also come up with policies that have played a major role in attracting foreign investment. One of the country’s most important policies is the open-door policy and this has also contributed largely to the economic transformation experienced by the country. The importance of this can be evidenced by the fact that foreign investment accumulation was in the vicinity of US$ 100 billion in the year 1994. These foreign investments have helped the country in acquiring numerous jobs. The income from foreign investment has also helped the country to have more capital assets like factories and industries. Most importantly, it has played a very important role in linking the Chinese market to the international market and this has facilitated technology transfer between China and other countries. The government also afforded tax advantages to foreign investors in the numerous coastal areas which are open and this has also helped the country to attract more foreign investors (Morisson, 2005).
Another important area that the Chinese government maneuvered carefully is in the price control issues. Although the government is keen in given autonomy to the various types of industries that are in the country, it has given autonomy to consumer goods and agricultural products producers but has limited the autonomy afforded to other sectors. This is because the government is aware that inflation can be very harmful to the economy and yet a rapidly growing economy is very prone to inflation. Inflation is a great danger to the growth of the Chinese economy and though it has been witnessed in the past, the government always comes up with policies that enable the economy to contain any inflation. This is the reason the government cannot fully liberalize the markets and offer unlimited autonomy to all sectors of the economy (Amsden, 2003).
Before 1978, China experienced an era of political instability which was marked by the political crisis in the country. However, the political climate changed for the better and thus the government was able to initiate a number of economic reforms that have seen the rapid growth of the Chinese economy (Rozelle, 2000).
The Chinese Industrial growth
With the foundation of New China, the modern industry emerging in China during the 19th century began growing rapidly. It was in this period that the national industry of China experienced very little growth and there was only an estimated 120,000 businesses in the whole vast land of China. The majority of these enterprises were workshops that dealt with assembling and repairing. These initial businesses were not adequately equipped and in return, they reported minimal scales of production (Wen, 2001).
After 1949 when New China was founded, the government confiscated capital that had been set aside for bureaucratic reasons and reformed the industrial sector of the country from communist oriented to capitalism oriented. The government further reformed the national industry which had a capitalistic outlook and also reformed domestically owned handicraft industry and the government came up with a national industry that had a socialist outlook. This was greatly rewarded because from 1950 to 1952 there was recorded a 145% growth in the national industry and an increase of 34.8% increase in annual output. The state did not rest at that point because from 1953 to 1957 saw the government laying out its five-year plan which encompassed economic and social development. This period saw the government actively improving the country’s infrastructure and improving industrial production and construction. This saw the accomplishment of a significant number of projects (Srinivasan, 2003).
The foundation of a strong economical base was laid by the government efforts to improve on its industrial output and the various innovations that the old enterprises were experiencing. These also laid a strong foundation for the socials industry to develop to greater heights in China. The industrial sector grew by about 128% during the five-year plan (Menzies, 1994).
The Chinese economy would later be subjected to chronic setbacks for twenty years from the year 1958 to the year 1978. This was attributed to the government’s emphasis on unrealistic growth rates. Apart from that, the economy would still be subjected to a more catastrophic downfall following the Cultural Revolution between the years 1966 and 1976. However, the economy was rescued by a session of the Communist Party of China held towards the end of 1978. After this session, the government started adopting new reforms and policies and this paved the way for the readjustment of the industrial sector of the Chinese economy (Peng, 1994).
The reforms paved the way for the abolishment of public controlled resources policy and the government came up with new policies that encouraged private ownership and also foreign investment was encouraged with foreign investors enjoying tax advantages in coastal China. This saw the increase of the industrial output grow at a very encouraging rate rather than the old system of public controlled industry (Hsu, 2005).
This has been the trend ever since and it has proved to be working for the country. The industrial output of China has risen to such an extent that it is boosting its national economic growth to very competitive rates. The industrial sector is greatly supported by the availability of a ready labor force that is very skilled and educated. This is because the government has invested heavily in the education of their workforce which has seen that the country is never short of manpower. Foreign investment also brings in a lot of income which is also used to increase the capital base for the economy (Mody, 1997).
China’s economy Challenges
In the past, there have been witnessed fluctuations in the Chinese economies, and these point to a weak policy as far as monetary policies are concerned. The country needs a monetary policy that is capable of sustaining stable and relatively low inflation. The monetary policy in China has adopted a fixed rate of exchange against the dollar which has helped in exposing the economy to monetary impulses of the dollar (Fan, 2002).
Another area of concern is the geographical disparity in income-earning and development. The government has come up with policies that have tended to increase money transfers and these have helped in decreasing inequalities in development. However, the government will need to further the liberalization of the labor market. Since 1999 the government has concentrated on investing in education and infrastructure in the poverty-ridden western side of China. This is meant to boost the economical development of that area. The rural areas should also be exempted from tax to foster growth (Wu, 1998).
The economy’s growth is also seen as acting as a catalyst for environmental pollution and the government needs to come up with good environmental policies which are aimed at protecting the environment. The growth of the industrial sector of the economy has also brought with it a gross degradation of the environment because there are a lot of emissions in the developing country and hence raising concerns over the quality of the environment (Taube, 2002).
Another challenge facing the government is the increasing gap between the rich and the poor. The rich are believed to be becoming richer while there is insignificant growth to the country’s poor people. A policy is needed to address this issue because it is raising a lot of concern over the welfare of the country’s poor population. Although the growth in the economy has helped improve the livelihood of the citizens, equality is a major step of economic development and hence should be taken into consideration when policies are being implemented (Cannon, 2000).
This paper has seen the economic history of the People’s Republic of China and has come to the conclusion that China is one of the largest economies in the world so far and economists have predicted that the country could be the next superpower twenty years to come. We have seen that the economy was the largest in the world for quite substantial years, being a world economic power for 90% of the recorded history of the world. This shows that the country has the capabilities of becoming a world power again in economic terms (Krugman, 1994).
We have seen that the country started facing a downfall in the economy during the mid-nineteenth century and this was trend continued until the modern government in 1978 came up with economic reforms that changed the country from a communist country to a socialist country. This has played a great role in fostering the rapid economic growth of the country which has seen the country become one of the economies the world has to reckon with. The industrial sector of the economy has also had major reforms and this has helped the country in achieving the growth rates it has been achieving since the year 2000, but the foundation of this growth was laid in the economic reforms of the year 1978 (Lu, 2001).
The country has been aided in achieving this growth rate by the policies that have encouraged foreign and domestic investment which have played a major role in boosting the economy of the world. Another major source of this growth was the labor force of the country which is also very skilled and educated and the government ensured that they would be lesser unemployment rates by ensuring the encouragement of local and foreign investment. China’s productivity is very highly rated and this is the most important aspect of the rapid growth in China. The country has proved to be a role model for other economies which are still struggling to attain the developed country’s status (Amsden, 2003).
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