Home Appliances To The Countryside Social Policy Essay
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Published: Mon, 5 Dec 2016
The home appliance industry in China has mainly focused on exporting to European and America markets. It generally achieved double-digit growth in years before 2008. However, the export market is withering in recent year. The export of household appliances and electronic products last year recorded only a 3% increase and contribute to 72.5 billion U.S. dollars in 2008 (Xinhua News, 2009). For example, China’s export value of color TV sets had annually dropped by 18.4 in the first quarter of 2008, came to 1.67 billion U.S. dollars (Customs of China, 2009). Foreseeing such a declining trend, the Ministry of Finance and the Ministry of Commerce of the People’s Republic of China had introduced a pilot project for rural residents in December 2007. Such pilot project was called “home appliances to the countryside” program which is a subsidy policy on electronic home appliances for rural areas. The trail was to be held in three provinces (Shandong, Henan and Sichuan) and one city (Qingdao) by offering rural residents a 13% subsidy on consuming the selected three categories (televisions, refrigerators and mobile phones) of home appliances items.
At present, the current level of utilization of home appliances in Chinese rural areas is only equivalent to that of the urban areas at the late 1980s (China Research and Intelligence Co., 2009). Every 100 Chinese rural households possess the number of color TVs, washing machines, cell phones and refrigerators only 2/3, 1/2, 1/2 and 1/4 respectively of the of urban households. The asymmetric information between the rural resident and the electronic home appliance industry results in adverse selection. This situation imposed the market failure as promoting electronic home appliances to rural areas. Hence, the subsidy policy of electronic home appliances for rural areas can be regarded as a policy support by the government in order to promote electronic home appliances and, thus drive a long-term structural change when encouraging manufacturers to design rural use products (Credit Suisse, 2009).
In the third quarter of 2008, the risk of second mortgage in the United State provoked the global financial tsunami. Due to the eruption of the global financial tsunami, the global economy is in recession and the export of China suffered a great loss. Moreover, when the financial crisis has plunged the world into recession, protectionism in the globe market has been on the rise. According to a recent World Bank study, from October 2008 to February 2009, forty seven trade-restricting measures were implemented (E. Gamberoni and R. Newfarmer, 2009). While the authority had paid attention on the rising tide of trade protectionism and recession of export market, by the way of the primary success of the pilot project and the first extension of the program in the December 2008, the government announced the”home appliances to the countryside” program would be extended into a national wide scale in February 2009 (Ministry of Finance, Ministry of Commerce and Ministry of Industry and Information Technology, 2008). According to the notice, the government aims to boost domestic demand to secure economic growth, improve living standard of the country’s rural population, boost domestic consumption and stimulate the industrial production growth through the program extension. Such national wide subsidy policy covers the entire rural areas in the nation with nine categories of home electronic appliance items.
Significances and aims of this study:
After the extension of the “home appliances to the countryside” program in February 2009, it nationally targeted to the entire rural residents. According to the National Bureau of Statistics, the population of rural residents is 7.2 hundred million approximately, which is 55.06% of the population of China (National Bureau of Statistics, 2008). With this large numbers of target participants, how the program to promote and implement rests on the government and the electronic home appliances industries.
The Chinese Premier, Wen Jiabao, has commented on the China’s stimulus package. According to his speech, ‘the China’s stimulus package is designed to both sustain economic growth and improve people’s livelihood’. Policies related to affecting people’s well-being are given priority to allocate public resources (Embassy of China in the US, 2009). Namely, the authority regards the subsidy policy a crucial strategy to increase domestic demand and secure the economic growth under the current economy circumstance and also a policy that also aims to improve the living standard of the rural residents. Ministry of Commerce estimates that the “home appliances to the countryside” program will boost domestic consumption and achieves RMB 150 billion in the first year and totally boost RMB 920 billion at the end of the program. However, compare with the approximate RMB 150 billion rural spending, the proportion is relatively small. During the first ten month of 2009, the national sales of the subsidy program was 2787.8 units which accounted for RMB 5.08 billion. Within this period, the sales figure record a continued dropping in August and September while the sales in August was around RMB 7.6 billion, and it was as low as RMB 6.2 billion in September. (People’s Daily, 2009). It was the first time of a continued two months sales decline from the RMB 8.8 billion sales in the July. These figures reveal that the outcome of the subsidy program is not able to meet the original approximation. This indicated the original estimation is too optimistic and overvalues the participations of rural residents.
The subsidy policy is a comprehensive strategy involving large numbers of rural residents and large amount of money. The participants of the rural residents are the key fundamental of the subsidy policy. Rural residents will not blindly consume what the electronic home appliance industry put on the market despite there is a 13% subsidy from the government. They have their concerns and evaluations to the policy.
This study mainly focuses on the “home appliances to the countryside” program after February 2009 and its aims to analysis the relationship among the government, the electronic home appliance industry and rural residents. For the government, the program is to boost domestic consumption in the rural area to secure economic growth. For the electronic home appliance manufacturers, they aim to gain benefits. For the rural residents, they consider to improve their living standard after purchasing the electronic home appliances through a subsided price. By studying their different purposes to participate in the program, I will try to conclude some suggestion to enhance the efficiency of the “home appliances to the countryside” program since the outcome is not satisfied with the assumed estimation.
“Home appliances to the countryside” program
The English translation as ‘”home appliances to the countryside” program’ was officially used in the government and media in China. The program first started as a pilot project on three provinces and one city in December 2007. After holding the pilot project for one year, in December 2008, phrase one of the “home appliances to the countryside” program which extended its area to a total of 14 provinces, directly controlled municipalities and autonomous regions was started. At last, in the February 2009, the program extends to entire rural areas in the nation and to subsidize the rural residents in nine categories of electronic home appliances (color TV sets, refrigerators, mobile phones, washing machines, air conditioners, water heaters, computers, microwave ovens and electromagnetic cookers). The program will last for four years to 2012 and rural residents were entitled to a 13% subsidy on purchasing the selected electronic home appliances (limited within two units in each category). Since this subsidy program targeted the rural residents, only those with rural residency qualify for the subsidies. According to regulations of operating the “home appliances to the countryside” program, a price limit was set on each category. (For example, color TV set RMB3500, refrigerators RMB2500, mobile phone RMB1000, washing machines RMB2000, etc). The original purpose to set up such limit is to ensure items are affordable to the rural residents. However, this limit was regarded as one of the factors that hinder to achieve the approximate rural expenditure.
The “home appliances to countryside” program has been running for more than ten months since February 2009 and different kinds of statistics were announced. According to the Ministry of Commerce, there are 17 home electronic appliances companies which has accumulated sales over 100 million and they include Haier, Gree, Midea, Skyworth, Konka, TCL, Lenovo, etc. Among these companies, Haier is the enterprise which benefits the most from subsidy program and has the highest accumulated sales figures of RMB 8.6 billion during the past 10 months. However, there are still 14 companies out of 348 which show fragmenting sales while another 17 enterprises sold less than 10 units (Minister of Commerce 2009).
Indicators of quality of live
As mentioned earlier in this study, the subsidy program in also a social welfare program. This policy supports the rural residents to buy electronic home appliances in order to improve their life standard. David E. Bloom, Patricia H. Craig and Pia N. Malaney in their study concluded several indicators to evaluate quality of life. They are ‘nutrition’, ‘health’, ‘education’, ‘income’, ‘gender equality’, ‘fertility’, ‘political, civil, and economic freedom’, ‘environmental quality’, ‘access to infrastructure’, and ‘access to information’.
Televisions and mobile phone convenience their life and also provide a channel for them to gain information. Manufactures are required to add special functions which are fit to use in rural environment. The models of mobile phone which selected in the program are required to enhance the signal accessing ability where signal from network operators in rural environment are instability. In the long run, the purpose of the subsidy program is guiding the manufactures to set up production line for rural markets. As a result, when the program ends in 2012, the subsidy program is expected to motivate the production of the electronic home appliances sector, meanwhile, stimulate the industrial structure development.
Consumption behavior in rural areas
The “home appliances to the countryside” program is a strategy to boost domestic consumption by encouraging the rural residents to consume more. By understanding the consumption behavior of the rural residents, the government can estimate their reflection and hence the efficiency of policies can be guaranteed.
Since there are various hierarchy of need, people would use their income to buy the basic survival resources as their priority while the development products would be subsequent and following by the leisure goods (W.H. Wong, 1999). In other words, there is a sequence of consuming. W. Guo concluded the basic sequence of expanding spending of rural residents in his study (W. Guo 1998). It is: reproduction goods, housing, and education for theyounger generation, transportation, electronic home appliances, and commodities. Under this sequence of consuming, we can predict the consumption behavior of rural households.
Basically, personal disposable income minus personal saving is personal consumption expenditure (N. Gregory Manki, 2004). Therefore, personal disposable income becomes one of the factors that affect personal consumption expenditure. Wong in his study indicated that, the consumption power and intention to spend are different in different level of household income. Rural households of high level income prefer to consume to increase living standard. On the contrast, rural households of low income level trend to fulfill basic need because of constraining by the limed of income.
When the rural residents can fulfill their basic need, they who are mobilized by the subsidy program are able to consume the electronic home appliances.
Insecurity income source due to deficient in land use
According to the World Bank, 90% of poverty is still rural excluding migrant workers from the rural population (World Bank, 2009). Although per capital net income of rural households has been being steady rising these years, the income gap between the urban and rural has also grown. According to the National Bureau of Statistic, in 2007 the per capital annual net income of urban households is around RMB 14908, meanwhile, the per capital annual net income of rural households is around RMB 4140, which is only 27.7% of the urban households (National Bureau of Statistic, 2008). Moreover, the rural households does not feel a sense of security on their income source since they only have use rights to but do not own the land themselves. In addition, the long-term investment in land is demotivated because of the insecurity of use rights (Jacoby H., Li G., Rozelle, S., 2002). Because of the consumption expenditure related to the personal income, in income of rural households are not security, they prefer to savings rather than consumption. It can be regarded one of the factors that demoviated the rural residents to participate in the “home appliance to countryside” program.
Coverage of Social Security is low in rural areas
According to China Social Security Annual Bulletin, in 2007, there were nearly 476 million people in China’s rural labor force. However, in that year, the numbers of workers contributed to the old age pension system was fewer than 52 million and only 11 percent of the rural labor force was covered by the scheme (Y. Yang, J.B. Williamson, C. Shen, 2009). Scholars conclude the old age pension system does not have reliable source of financing, and full of problems of funds embezzlement and is low benefits (I. Nielsen, C. Nyland, R. Smyth, M.Q. Zhang and C. J. Zhu, 2005). Since they do not and are not force to contribute to the old age pension. The rural residents rely on their savings as their risk protection. As a result, the attraction to the rural residents of the 13% subsidy from the program will decrease and the participation of the rural will be affected.
Game theory is a study of the ways in whichstrategic interactionsamongrational playersproduceoutcomeswith respect to theutilities of those players (Daniel Burgess, 2005). In other words, game theory analyses how agents (players) make decision which sufficient their own utilities instrategic situations (games). It is a mathematic theory which can be applied toin thesocial sciences research. It emphases that each player involved in game will estimate their benefits and acts in order to gain the best outcome individually. If in a situation where it is not possible to increase benefits only by the implementation of one single player, this strategy is called the Nash equilibrium. Players involved in game relation will only seek to benefit oneself, it sometimes leads to a situation of prisoner dilemma. In such situation, people do not cooperate although by so they can make both of them to be better off. ‘The efficiency of a policy depends on the coherence between the Nash equilibrium and policy maker’s ideal focal point’ (Osborne, Martin J. & Rubinstein, Ariel, 2003). Every participant involves a policy will make different choices which affect the outcome and efficiency of a policy. As a result, we can use the conclusion by analyzing game models of each participant to improve the efficiency of a policy.
The “home appliances to the countryside” program has dual functions. On one hand, it is an economic policy that emphases on maintaining economy growth by boosting domestic consumption. On the other hand, it is a social welfare policy that accents on improving the living standard of rural residents by subsidizing them to purchase electronic home appliances. The government, the electronic home appliances industry and the rural residents can choose their own strategies to participate to the “home appliances to countryside” program. This study argues the game relations among the players of the “home appliances to countryside” program will hinder the rural residents to participate to the program. As a result, the expected outcome of the subsidy program will be held back.
As mentioned before, according to the game theory, the efficiency of a policy depends on the coherence between the Nash equilibrium and policy maker’s ideal focal point. The gap between the objectives and results of the policy originated from the game relations among the players. Although the government has had a good intention, the results of the program gained at present were not conforming to the original estimation. In this study, a game-theoretic model is used to study the relationships among rural residents, enterprises and governments under the policy that rural residents are encouraged to participate to the subsidy program. The government can choose to optimize the program in order to attract more rural residents to participate and consume. The rural resident can choose to or not to participate in the program by calculating their benefit and loss. As each participant seeks to satisfy its utility, this program can be analyzed as an n-person non-cooperative game. This paper tries to relocate the roles of governments, and put forward some policy suggestion on promoting the “home appliances to the countryside” program.
In research methodology, I will use data analysis as well as document analysis methods to analyze in which areas the government should improve the “home appliances to the countryside” program. The Ministry of Commerce and the National Bureau of Statistics have been promulgating data about the subsidy program each month. Moreover, Thought these data, the game relations among the participants in the program (including the government, the industry and rural residents) can be examined. Since the subsidy program is highly concerned by the public. Scholars have been investigated and commented on the program. Their researches can contribute to relevance the game relation among the participants.
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