Introduction
The rise of the Communists into the realms of power after the Chinese Civil War in 1949 was to usher China into a new form of political economy (Chow 2007: 13). The Communists set about to implement their economic policies which were to the most part based on a government planned economy.
Such governmental control on the functioning of commerce came at a large cost to the Chinese as their global competitiveness was almost nonexistent. The country was markedly prone to agricultural inadequacies resulting from a lack of capacity from the communally owned farms (Knight & Lina 2005: 24).
Economic strife also resulted because local industries were increasingly becoming overwhelmed in trying to meet the local demand of the ever increasing populace (Eichengreen & Tong 2006: 76).
Having realized the negative impact that the tightly controlled economy was having on the country’s ability to self cater, the government, in the 1979, set about to transform its economic policies.
The first step was to transform the agricultural sector, thus giving rise to private ownership. The economic liberalization that resulted saw millions of rural farmers increase their living standards tremendously.
In urban areas, the government relaxed investment regulations, thus attracting foreign investment and becoming more prone to free market policies. The result of these economic reforms was that China has over the past three decades revolutionized its economy tremendously into becoming an economic heavy weight (Chow 2007: 23).
This paper tracks the evolution of the Chinese economy from the development strategy that set up all the current gains. The development strategy is examined on the basis of economic development.
The paper then looks at the economic views that have enhanced development by promoting commerce and attracting investment. In effect, the paper examines how a market economy can be credited for China’s rapid economic growth over the past three decades.
Development economics
The link between economic policies and the resulting development that is brought about in a society is the basis of development economics (Todaro & Smith, 2009: 7-8). This link between economics and the role it plays in development is mostly linked to the developing nations of Africa, Asia and Latin America.
There are various theories that try to explain the link between availability of productive resources and sustainable growth over time. The social conflict theory, for instance, can be used to explain how the agricultural productivity of China was failing prior to economic reforms due to the socio-political conflict of production (Rodan et al. 2006: 6).
The universally owned farm lands, for instance, were not performing due to lack of process ownership of the resource by the farmers.
According to the modernization theory, economic development of China along with other South-East Asian nations was achieved as a result of following a similar transition that Western Europe made. The transition was from largely agrarian based economies towards industrial based economies (Rodan et al. 2006: 8).
Development strategies
Due to the fact that China’s main problem at the time of the economic reforms of 1979 were policy based as opposed to infrastructural in nature, dealing with the problems on paper appeared relatively easy.
All that needed to be done was to amend the policies that restricted and impeded local investment as a result of government interventions. Nowhere was this more evident than in agriculture where communist policies of joint and communal farming did little in boosting yields (Knight & Lina, 2005: 26).
However, once farms were given to private citizens to man as opposed to groups, yields were drastically increased as better harvests usually meant higher returns for the farmers. The most significant result of the economic reforms was the strategy to decentralize the country’s economy.
This was of importance considering that China is a big country and micromanagement by government was negatively impacting on commerce. At first, centralized control of the economy by the communists was welcomed as it ensured that the inequity that had existed in the nation prior to the civil war was being addressed.
However, with passage of time, the centralized control proved to be costly in generating quality for Chinese products especially in the urban areas where heavy control hampered industrial innovations (Tang et al. 2008: 5).
Therefore, by getting rid of centralized control, the country could effectively start to experience industry driven economic growth.
Minimizing control of government was not the only solution, but was rather a fundamental solution necessary to spur economic growth (Chow, 2007: 78).
The next stages involved the country attracting foreign direct investment (FDI) and making the environment more convenient for investors. This was to involve the relaxation of price control policies, which were normally huge deterrents to investment, by introduction of free market dynamics in the country.
Private ownership of vital investments by Chinese nationals as opposed to government ownership gave more incentive to foreign investors to invest in strategic Chinese installations. Privatization of state enterprises was a great way of demonstrating diminishing government control, and thus promoting more investor confidence in China.
To demonstrate the impacts that economic reforms have had on China, in 2007 the private sector in China accounted for close to 55% of the country’s GDP.
This statistic is especially important when one contrasts the figure with the pre-1979 data in which the state accounted for over 90% of the economic activity in the country through direct involvement.
Change in economic views
For a country such as China, the influence of the state in inevitably linked to the success of the economy (Siraj 2011: 62). This is because unlike nations in the West such as the US where governments play the role of facilitator and are seldom directly involved in business, the situation is different in China.
The government is an active player in the country’s economy and although economic reform has seen the nation’s economic outlay fall more and more out of governmental control, a lot remains to be done (Tang et al. 2008: 8).
For instance, the banking and energy sector, arguably two of the largest economic sectors in the country, are still under heavy government control. China’s economic journey is, however, still down to the government’s willingness to adopt new policies.
The communist policies were not doing much in terms of spurring economic growth in China and the leaders realized this reality. However, shifting to capitalism was not an option since outright capitalism requires far reaching governance changes.
The leadership was not particularly keen to accept political changes of capitalism and thus had to be innovative in their policies (Eichengreen & Tong 2006: 74).
As a result, the leadership ushered in enough aspects of capitalism that were necessary to inject some life into their economy without fundamentally changing their communist ideals.
It is this unorthodox blend of capitalism and communism that has been instrumental in driving China forward (Eichengreen & Tong 2006: 74). In fact scholars argue that China has been able to reap great economic benefits by embracing capitalism only to such an extent that the country gets the best out of its workforce.
This has been achieved by being able to minimize the disruptions that usually result from trade disputes and strikes. There is worldwide condemnation of the Chinese ban on unions.
China has been able to keep its unemployment rates to being the lowest among the top economies mainly due to the availability of affordable labour that has consequently continued to attract more FDI (Tang et al. 2008: 11).
Free market
Most of the economic theories in operation in most of the world economies openly advocate for the importance of a free market in economic development. As a matter of fact, it is argued that free markets normally produce the best possible outcomes in almost all circumstances.
The reason behind such an argument is the fact that a free market devoid of governmental interference and only subject to market forces is normally easier to operate (Chang 2003: 48). China has over the past few decades aimed to fully benefit from the benefits of a free market system, especially with regard to its foreign trade.
China has the world’s largest population and, therefore, the potential of the Chinese market cannot be over emphasized. However, it is the position of China as a major player in the export market that has largely benefited as a result of introduction of the free market policies.
The country has transformed itself into a premium investment destination attracting huge multinationals to set up shop in the country (Knight & Lina 2005: 55).
In order to continue attracting such multinationals, it was paramount for the country to amend most of its restrictive policies that had in the recent past hampered investment in the country.
Multinationals could take advantage of China’s low cost of doing business and shift their operations to the country while operating free of the restraints of an overbearing government.
This free market brought about a win-win situation whereby investors have a favourable environment for conducting business while the Chinese continue to boost their capacity in global commerce.
Therefore, the introduction of free market policies in the country was instrumental in keeping these corporations in China.
Joining WTO
Despite the Deng Xiaoping economic reforms and China’s opening up to foreign investment, investors were still largely sceptical of doing business in China (Chow 2007: 85). The reason was that despite all the benefits that could result from doing business in China, all the rules were controlled by the Chinese.
China was not party to any international trade organization and was, therefore, not subject to any form of international regulations. It was, thus, risky for a company to come up and set up its entire operations within China as there was no form of protection that could be afforded to the foreign company.
Protection of foreign investments is important in an economy because it safeguards the infant establishments from unfair competition that may result from local establishment (Morrison 2012: 6).
China had realized the importance of being party to a global trade organization and was keen to join the World Trade Organization (WTO) from as early as the mid 1980s. China later became a full member of the WTO in 2001.
The advantages of joining the WTO with regard to China are that the country was able to attract long term investments. This aspect had been a weakness of the Chinese economy throughout the 1990s as many international corporations restricted their investments to China to only small outlets.
The reason that was quoted was that China was subject to unpredictable and volatile policy shifts that left investment in the region vulnerable (Morrison 2012: 2). In the absence of China’s involvement in an international trade organization, the government found it hard to convince companies to make huge and long term investments.
The WTO membership was to change this scepticism as more investors grew their confidence in the Chinese government’s ability to safeguard their investments.
According to an article, ‘China’s participation benefits all global trading partners’ appearing in China Daily’s Economy section, the WTO Director General underpinned the importance of China’s accession to the WTO at the World Economic Forum summit in Davos. By joining the WTO, China underpinned a successful economic policy that had begun 20 years back in 1979.
Conclusion
Before ascending into becoming one of the world’s largest economies, China’s ascent was a long and tumultuous journey. The country had to adopt new economic reforms in the late 1970s as the then existing communist based governmental control of the economy was no longer effective.
The choice of a development strategy that was based on a capitalistic free market approach proved to be the answer to awakening the Chinese economic might. The country became globally competitive once it had embarked on its economic development policies.
The resulting changes in economic views by the government were not very convincing during the first 20 years to foreign investors who were wary of the country’s economic policies.
However, by joining the WTO, China’s commitment to safeguarding its economic future was cemented due to the increased confidence in China that foreign investors now had.
In order to maintain such tremendous economic growth, China needs more policy reforms especially in labour laws so as to increase the standards of living of the workers to be at par with the economy.
List of References
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Knight, J & Lina, S 2005, Towards a labor market in China, Oxford University Press, Oxford.
Morrison, W 2012, ‘China-U.S. trade issues’, Congressional Research Service (CRS), CRS Report for Congress, RL 33536.
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