Saturday, 11 August 2012

7 Reasons for the Chinese Economic Miracle

The Chinese economy has been growing at an average rate of 10% for the past three decades. This unprecedented growth has astounded onlookers, but many who do not read into the Chinese economic miracle have little to say about why this has happened. They often chalk it up to exports and the manufacturing boom, often represented by a 'made in China' signature on the bottoms of cheap plastic products. That is only a small part of why China is rivalling the United States as the world's industrial powerhouse. Here are seven reasons for the Chinese economic miracle.

1. Peasants could farm a section of land for themselves

Previously, both the ownership and use of land was collectivised. Farms were people's communes, whereby all the peasants working the land owned it, and they farmed collectively. The reform that ended 20 years of collective farming didn't redistribute land ownership; rather, it allocated the use of land through a contract, so that peasants could choose how they wanted to farm the land. This reform took place over 5 years and considerably increased efficiency and output.

2. The relaxation of price controls on foodstuffs
Before the reforms, basic foods such as grain, meat and eggs were distributed using a strict rationing system by the government. The price that was paid by the government for these foods was so low that firms didn't want to produce them. It led to bad food quality and inefficient production.
The farming reforms were the first step out of three to undo the pricing controls. The second step was the introduction of free local markets to support the first reform. And the third step involved aggressively raising the price ceilings, which helped suppliers and promoted productivity. The government also lowered the price for agricultural machinery to promote farming mechanisation.

3. The 'profit motive' was introduced

Before the reforms, farmers produced according to a quota to give to the government, as well as making food for themselves. The changes didn't completely dispense with the quota, but now, any harvest that exceeded it could be sold at market. This improved farm output, increased incomes and quality of life, and because of the newfound prosperity, small rural industry began to crop up, bringing new consumer goods to the rural population.

4. The Chinese government welcomes foreign businesses to invest

The Chinese government and people were historically opposed to foreign direct investment, equating it to Western imperialism. However, they did realise the benefits - namely, that it would introduce new technologies, know-how and capital to develop the export sector. Many laws, regulations and bureaucratic procedures proved cumbersome. So recognising the role that foreign investment would soon play in China’s growth, the government began to respond to the complaints of foreigners about doing business in China.
Open Economic Zones (OEZs) were established, where foreign firms had free rein over what they imported and exported, where labour laws were much more flexible, and where land use was freed up. In these zones, the local governments could heavily invest in infrastructure, as long as they could raise the funds for themselves.
This reform created employment opportunities, expanded the capital stock, was a catalyst for infrastructure investment and ultimately drove the strong productivity growth, and helped unlock the economic potential for China’s enormous population.

5. Transfer of technology
The foreign direct investment enabled by these reforms, empowered the economy to make productivity and technological gains in leaps and bounds – as a technology catch-up effort usually proves faster than brand-new innovation. A catch-up of similar haste occurred during Josef Stalin's industrial revolution. However, rather than coordinated by a central government, China’s industrialisation occurred as a result of market forces. The manufactures’ export boom required imports of vast amounts of capital, from mining and smelting equipment, to sewing machines to plastic moulding and car-making machinery. This improved the quality of consumer goods and although much of the production was exported, some was purchased by the rapidly growing middle-class.

6. Transfer of population from traditional farming to higher-value-added manufacturing
The sweeping free-market reforms brought about significant productivity improvements initiating an expansion in agricultural output, but decreasing demand for labour. In addition, the manufacturing boom caused huge demand for factory jobs that paid far more than the average rural job, actually 3.3 times more. The resulting oversupply in the West, and growing labour demand in the East, brought on an inter-provincial migration towards eastern, urban areas that has been unparalleled in size. As of 2007, the rural-to-urban migrant population in China amounted to 140 million people. This created massive growth in manufacturing output, as well as services growth - the secondary sector now making up 29% of output and the tertiary sector making up 56% of output.

7. Restrictive banking system and absence of a welfare safety net led to a high savings rate

As explored in a previous article on China, the banking system is uncompetitive: 98% of banking assets and many of the financial institutions being state-owned. The implication of this is uncompetitive behaviour mainly in the form of low returns for depositors. And, because the Chinese welfare system is under-developed, the average Chinese citizen has not much of a safety net to fall back on. As a result, China has a huge savings rate - 51% of GDP, which safely facilitates the slightly smaller, but still hefty, investment rate. With so much liquidity in the system, the state-run banks are well insulated against an economic crisis. But, the plentiful savings that allows heavy investment - though mostly by state owned enterprise, have driven much of China's economic growth in recent years.

The Chinese economy has been a shining example of how to help hundreds of millions of people out of a poverty trap, and how to foster an environment of strong exports. However, there is still a long way to go before the income per capita of China even comes close to that of the European, American and Japanese. And China's growing thirst for oil, hunger for protein and demand for minerals poses a significant problem for the viability of the excesses of the Western consumer culture. There are threats to the environment and to the prospects of future African prosperity among other things, and China's military is a new worry for America's military dominance. Unfortunately, I am not a cock-eyed optimist, so I believe that very few of these issues will be dealt with the way they should, if at all. Policy makers worldwide are facing a composite threat to global peace and sustainability, China, and it will be fascinating to see how they deal with it.


1 comment:

  1. I'd been looking for a concise and well-informed explanation for the drastic economic growth in China when I came across this. It's absolutely perfect so I'd just like to say thanks for writing it!


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