The Driving Force Behind Chinas Economic Growth Economics Essay

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This paper will focus on five main reasons behind the China's rapid economic growth, and also implementing economic theory to demonstrate the process and the outcome when emplacing the economic policies China has chosen to use. I will also be bringing in some history to show some background on China's working ethic in the past and how the establishment of The Peoples Republic of China affected China's growth, and also the transition of leader ship from Mao Zedong, the leader of the Communist Party of China (CPC) in 1958 intended to transforms China's economy by focusing on the development of the agricultural and industrial aspects of the country to Deng Xiaoping, his successor who made the first step to open up China to the rest of the world.

The five main forces I will be discussing are of the following, firstly China's labour force; with such a vast population China is able to provide the world with goods at low prices through cheap labour. China's population mainly consists of a large number of unskilled workers who are willing to work for low wages when compared to modernized countries. China has specialised in manufacturing which has lead to many workers such as farmers with agricultural backgrounds especially in the northern region of China moving to the southern region to accept low wage jobs in factories. China is second in exports in the world right under the European Union with a staggering estimate of $ 1,506,000,000,000 in 2010 [1] . Secondly, China's education system, currently China's workforce consists of a vast amount of unskilled labour. However, figures show that an increase in the service sector in China has occurred significantly which would be a result of expansion of education and training. The importance of education is crucial for China to diversify itself out of the manufacturing industry to reap the benefits of the tertiary sector. However China has a large number of lower class citizens, whose incomes are significantly, lower than those of the middle class, this affects their children's opportunities to climb the 'social ladder' as some educational institutions are very costly. However China's central government has made agreements to increase expenditure on education to 4 percent of the Country's GDP in 2012. With increased spending on the educational system, China will be able to expand growth in other areas. Thirdly, Investment from overseas, this plays a crucial role in the economic growth of China. In 1978, Deng Xiaoping, the leader of the CPC between 1982-87, opened up China to foreign trade and investment, this allowed China to become more competitive in the world market and for foreign investors to not only help business grow in China but also contributed towards infrastructure and employment. Which leads us to the fourth reason, government policy; China's economic reform had the goal to transform China's stagnant planned economy into a market economy with the intention for great economic growth and increasing the well-being of Chinese Citizens. Measure such as keeping the Renminbi (Chinese currency) low relative to the US Dollar to help encourage the exports and generate higher revenue for companies and also keeping interest rates low to reduce the burden of soaring municipal debt. And lastly, China is endowed with most of the important industrial ores, fuels, and other minerals. By the early to mid-1980s, China was a significant exporter of rare metals necessary for the aerospace and electronics industries. However China is also a big importer, for commodities such as oil, China buys energy deposits and contracts to attain its objectives. This secures the needs of China for the present as well as the future. [2] 

History of Chinese Economics (Pre Modern China)

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Between 1368 and 1800 China's economy experienced immense expansion due to a steady rise in the country's population. Agriculture, industry and trade all increased in absolute terms however remained stagnated in relative per capita terms. China experienced quantitative growth rather than qualitative growth, this is described best by James Graham, a historian from HistoryOrb, he stated that 'Quantitative growth is in effect growth in a country's gross domestic product (GDP) and qualitative growth an increase in a country's GDP per capita. Quality of life, life expectancy, income distribution and other factors also affect the quality of growth. All are hard to measure and virtually impossible to gauge in a systematic manner for pre- modern China. Thus there are limitations as to how far a qualitative standstill for China can be proved or disproved.' [3] 

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China operated under a tribute system, which is defined 'a requisition in kind or in money collected by victors from conquered tribes or states' [4] . The system demanded foreign states to give tribute to China and the emperor to grant permission to trade with China, this included countries such as Vietnam, Japan, Cambodia to even some European countries in the 1500's. China insured its security between other states in two ways, the pacifist approach which was the part of the tribute system which insured peace between states as long as they paid their tributes, and the other being a militant approach, the aggressive alternative for if the pacifist method shows to be ineffective.

Manchuria (large geographic region in northeast Asia under China's control during the Qing Dynasty) became subject great foreign control during 1895 and 1914, mainly by Russia and Japan. China lost part sovereignty over North Manchuria to Russia under the Treaty of Aigun and the Treaty of Peking. Manchuria was divided into Outer Manchuria (Russian control) and Inner Manchuria (China control).

Leading onto the most significant part of China's history which helps explains the rapid growth of China would be the establishment of the Peoples Republic of China. The communist Party of China (CPC) is the founding and ruling political party of the Peoples Republic of China. After the fall of the Qing Dynasty, China experience a time where the people were without an authority to rule over. This gave way to the birth of Communism in China, which was mainly due to Mao Zedong. Communism came to power in 1949 under Mao, with intentions to create equality in the nation, the people of China suffered more than benefited. Poverty increased amongst rural areas and less attention was upon education, science and technology advancement.

China's economy changed in the 1970s after Mao's death. Deng Xiaoping took control and possessed different view than those of Mao's. He believed that China should adopt a more free market system to succeed and recover the economy. With the promotion of modern industrialization China's economy began to flourish. In result with the embracement of some Capitalist principles, China's economy began to rebuild and become the World's second largest economy to date.

Large population with low wages

With an astonishing figure of 1.3 billion people (figures from 2008), making China the most populated country in the world. With such a large population China has immense man power, which explains their comparative advantage within the manufacturing industry. Population growth has very strong ties with economic development and China is a clear example of this. A general increase in the number of people has significant increase in aspects such as markets, the environment, education and employment. Each individual has a minimum resource requirement but they also have a productive capacity. Productive capacity will vary depending on the individual's abilities and skills. In the case of China, low skilled workers are of the majority within the country. With limited skills workers have fewer options on the type of employment that are applicable to them. Unlike the western world where the manufacturing industry was established under the innovation of a number of individuals, China's manufacturing industry has been created in response to global demand. [5] The demand of Chinese manufactured goods is, for the most part, from the western companies, the design and innovation behind the products being ordered are not from China. To fulfil such large demands from overseas, the Chinese manufacturing industry used its population to its advantage, providing low skilled workers with minimum options for employment in fairly simple factory line jobs at low wages.

China's GDP - Industry perspective

China GDP by industry

Source: Starmass.com

The graph shows that the secondary industry is the most predominant in China and has been since the reform in the 1970s and it counts for nearly 50% of China's GDP. On the other hand the primary industry has fallen from roughly 28% in 1978 to 11% in 2007. Agriculture was on the decline due the slow process of producing output when put in comparison to the other sectors. The tertiary industry has been rising significantly and coming closer to the secondary industry percentage, this is mainly caused by the increasing level of foreign direct investment in China in areas such as finance, real estate and information technology.

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The average annual employment income of a worker in China as measured in 2004 from the China statistical yearbook in rural and urban areas had a disposable income of (in current yuans) 7,942, which is equivelent to just over 1200 US dollars, urban area alone showed to be higher at 13,574 Yuans which is an equivelent to about 2000 US dollars. This is significantly low when compared to the United States average income being $31,410. However China's average wages have risen steadily since the economic reform. Real wages after 1997 'increae at a accelerating rate (14% per year) after the 1997 when state enterprise restrucitng was at its high point'. (Brandt & Rawski 2008)

China's mean annual wages

Source: China's Great Economic Transformation - Brandt & Rawski Ch.6 P.184

However there is the problem of overpopulation, which leads us to the introduction of the One-Child Policy. Originally introduced by Deng Xiaoping in 1979, the policy was a measure to control the population growth rate in China. It was originally a temporary measure but is however still active in the current time. The policy allows the people of China to only have one child per couple, the only exception to this would be that if the first child was female, which allows them to attempt to have a male one more time. The policy itself affects people in the urban areas more than the rural, as urban areas tend to be monitored more strictly. China has such vast lands with numerous individual villages that monitoring the whole country would prove to be difficult and most importantly costly. The effects of this policy on economic growth is subject to criticism from demographer Nicholas Eberstadt, which argues in his article 'China's Family Planning Goes Awry' [6] that China's growth relies heavily on cheap labour therefore if China enforces a policy to decrease population, then it faces a current ageing population and a decrease in the numbers of labour in the future from next generations due to the decrease of the population.

Educational System and training

Education and training plays a crucial part in how; not only China, but any other developing country achieves economic growth. Educating and training the workforce will allow countries to develop an advantage. In such a globalized world, international trade is very important for developing countries growth. To succeed in growth through trade, the country must become competitive to flourish in the market. In the case of the China's economy we see a clear comparative advantage in the production of quality goods and cheap prices. However not only has China achieved great status within secondary sector, but she has also been seeing an increasing number of workers in the tertiary sector (as shown in the diagram in the first principle).

After the economic reform China's educational policies made a move from the 'radical socialist agenda'. China focused more on how to transform educational system to better suit the labour market. A better equipped workforce will help increase economic growth in the economy, and it also will promote China's global competitiveness. During the Cultural Revolution, education progress and achievement was biased towards those who showed loyalty to the political views and those who had higher class backgrounds. Higher education was also affected as the national examination and admissions to undergraduates were stopped for a certain time. This also created a negative effect on scientific and technological advancements within China. It wasn't until the late 1970s when education made a turn around to promote market reforms and economic modernization. The realisation of the quality of education was quickly put into action; standards were set for compulsory education and an increase level of high quality teachers were put into place. Low quality institutions were shut down and replaced with better funded and higher quality schools. (Rawski & Brandt 2008)

Source: China's Great Economic Transformation - Brandt & Rawski , Ch.7 P.223

The graph shows an upward trend in education expenditure in 1997, and an increase in provincial GDP per capita. This shows an increase in interest by students in education in more recent times as a result to the encouragement of economic reform.

Education in the present time still has restrictions amongst citizens in China, especially in rural areas. China's government still have to amend the issue of lack of education in rural areas as this creates a large wage gap and limits the opportunities of those who wish to pursue their interests in education and acquire skills, which in return increases GDP and expands growth even more.

Foreign Direct Investment - To and from China

Foreign direct investment (FDI) from other countries to China and to other countries from China has a role to play in the economic growth. Foreign direct investment is key for development of developing countries, as the investment received from overseas usually leads to enhancements to various industries, infrastructure, and creates employment. The diagram below shows the top 10 countries and the level of FDI received from them to China:

Top 10 countries investing(FDI) in China [1860]

Source: Milind's Data Tracking Website [7] 

FDI inflows can help fund research and development; it can create technological opportunities for domestic firms (Brandt & Rawski 2008). With foreign firms entering into China, competition will also be spurred with domestic firms. The new sense of motivation from domestic firms to match foreign firms or even surpass them will be a positive effect on the economy, as a component of growth is investment, therefore an increase in foreign and domestic investment in technological advancements will increase productivity and therefore increasing economic growth.

FDI inflows (US$ Billions)

Contracted

Utilised

1984

2.7

1.3

1985

5.9

1.7

1986

2.8

1.9

1987

3.7

2.3

1988

5.3

3.2

1989

5.6

3.4

1990

6.6

3.5

1991

12.0

4.4

1992

58.1

11.0

1993

111.4

27.5

1994

82.7

33.8

1995

91.3

37.5

1996

79.9

41.7

1997

51.0

45.3

1998

52.1

45.5

1999

41.2

40.4

2000

64.2

42.1

2001

71.1

48.8

2002

84.8

55.0

2003

115.1

53.5

2004

153.5

60.6

2005

60.3

2006

63.0

2007

74.8

2008

92.4

Source: Ministry of commerce of the Peoples Republic of China [8] 

China's domestic markets have shown to be very attractive to foreign investors. With such high levels of FDI, China is able to achieve sustainable growth, especially with increasing levels of global consumption for goods and China being the source of manufacturing. The FDI confidence index survey done by AT Kearney [9] in 2010 show that China was the first ranked in terms of attractiveness of investment and has been since 2002.

FDI Confidence Index

Source: AT Kearny - FDI Confidence Index

FDI also works in the opposite direction. The Chinese have a distinguishable tradition of high savings. In the current economic climate, borrowing is crucial to many developed economies, the United States being a prime example. In the macro-economic perspective, we can look at the 'Savings Glut' hypothesis proposed by Ben Bernanke in 2005. The savings glut hypothesis simply states that there is an increasing rate of savings globally; this leads to a fall in world interest rates. The savings glut is mainly coming from East Asia which links to the current account deficit in the United States. [10] The excess levels savings from China is then invested in foreign assets for yields or lent to developed countries like the United States which is then partially used to consume products from China. China is one of the largest holders of US debt ($1.1 trillion). [11] 

Economic Policies

In 1989, China was experiencing a major crisis; the Tiananmen Square massacre gave clear example that socialism in China was no longer a beneficial approach. This gave way to the first steps of liberalisation of China in a political and economical sense. Capitalist values were being considered amongst politicians and the introduction of Open-Door policy begun.

'The Open-Door policy (or Open-Policy) refers to the set of policies adopted by the reformist leadership since the third Plenum of the Eleventh Central Committee in December 1978 to promote the expansion to economic relations with that capitalists world economy' (Jude Howell 1993). This policy was the most important factor behind the successfulness of China today, as the opening up of markets lead to beneficial components required for expansion of China's economy. As previously mentioned in the previous point, China's open policy gave way to foreign direct investment and international trade.