How far do you agree that the success of China’s economic growth since 1978 is due to its Open Door Policy?

How far do you agree that the success of China’s economic growth since 1978 is due to its Open Door Policy?

In China’s modern day economic history the Open Door Policy refers to the new policy announced by the late Chinese leader Deng Xiaoping in December 1978 to open the door to foreign businesses that wanted to set up in China. This policy adopted a stance to achieve economic growth through the active introduction of foreign capital and technology while maintaining its commitment to socialism. Since the implementation of this policy by Deng Xiaoping, is can be seen as a turning point in China economy where it was transformed from a previously failing economy whereby 60% percent of China’s 1 billion people survive on less that USD $1 a day which is the international poverty standards, to becoming one of the fastest growing economies in the 1980s. Thus, I agree that the success of China’s economic growth since 1978 is indeed due to its Open Door Policy as it paved the way for subsequent policies to be implemented by the Chinese government such as the Special Economic Zones (SEZ) and Foreign Direct Investments (FDI). At the same time, it must be noted that China’s phenomenal growth is only possible when governmental policies is able to release and harness China’s potentials towards achieving greater wealth for all.

 

  • Special Economic Zones (SEZs)

Special Economic Zones (SEZ) were set up in 1980 due to Deng Xiaoping’s belief that in order to modernize China’s industry and boost its economy, it needed to welcome Foreign Direct Investment. It was then that Chinese economic policy shifted to encouraging and supporting foreign trade and investment. SEZs were then  established in Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province and the entire province of Hainan and these areas were able to enjoy special privileges such as lower tax rates which aims to promote direct foreign investments, boosting its economy. With the success that these economic zones were having, it lead to China opening up even more economic zones that eventually had the same successes that the first SEZ had, improving the economic growth of China.

 

  • Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is another manifestation of the Open Door Policy which too, ensued the success of the Chinese economy since 1978. Prior to the decades before 1979, FDI was literally nonexistent in China. It was only with the Open Door Policy, the Chinese government then actively promoted and encouraged FDI as it provided the bulk of financing for China’s financing sector. Initially in 1983, the flow of foreign investment was a mere U.S. $1.7 billion, it then increased to $5.3 billion in 1988, and to $11.4 billion in 1991. Eventually, it was known that China has surpassed the United States as the world’s largest recipient for foreign investments. With these influx of FDI into China, it proved to have benefited the country tremendously with the transfer of technology, capital and the opening up of overseas export markets for China. In addition, China was able to use the huge surplus gained through these investments to invest in infrastructural and public projects that further grew China’s economy.

 

  • Determination of the CCP

The authoritarian governance of the CCP and its commitment to develop its economic growth plays a crucial role in ensuring the success of China’s economic growth. This is so as the government realized that economic growth is required to continuously generate employment and revenue for China’s vast populace and that massive populace could result in socio-political instability as it releases pent up socio-political resentments against the party. In addition, continued economic growth could also ameliorate the development and income disparity within the country. This proved to be the perfect opportunity for the Chinese government to ensure their legitimacy as it is able to ensure social stability amongst the people. Hence it was through the sheer determination of the Chinese government that led to the success of China’s economic growth since 1978.

 

  • Ability to integrate into the global economic system

China’s ability to integrate into the global economic system was also another strategy that led to the success of China’s economic growth since 1978. By effectively integrating into the global economic system, China has become one of the world’s largest markets for natural resources and primary commodities, producing a wide range of industrial and manufactured products for the world. With China’s vast market, East Asian economies benefited greatly, whilst China’s exports flood markets of developed countries. As such, this allowed China to effectively assimilate into the global economic system as China was becoming increasing relevant with regards to global trade and business. Furthermore, more than half of China’s exports are handled by foreign invested enterprises, especially from Japan, Korea, Taiwan and Hong Kong. Thus, showing that China has indeed became the integrator of global and regional production networks which can be said to contribute to the success of China’s economic growth since 1978.

 

  • Strong Manufacturing Base

By having a strong manufacturing base, China was able to ensure the success of its economic growth since 1978. China improved their industrial structure by upgrading from low-value-added agricultural sector to high-value-added industries such as manufacturing. By upgrading the industrial structure, it became more focused in the high-value added production sector by allocating its labour force in a more efficient manner. This was done by China having surplus labour and low wages, reducing the operation costs of manufacturing its goods. Hence, this made China a very ideal manufacturing hub.  In electronics and hardware, China is the manufacturing hub for companies like Siemens and Hitachi Global Systems. As such, this significantly contributed to the rapid growth of China economy, leading China to become the world’s manufacturing hub. China is not only the world’s largest exporter, surpassing Germany in 2009, it is also the world’s largest trading nation as measured by the sum of exports and imports, having replaced the United States for the first time in 2014. Hence, with the rapid shift to manufacturing higher end products and collaborations with reputable foreign companies, too, contributed to the success of China’s economic growth since 1978.

Upon analyzing the impact of China’s Open Door Policy on China’s economic growth since 1978, it can be observed that it has indeed improved its economic growth drastically, leading to the economic successes that we see today.

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“China’s economic development is most threatened by its regional disparities”. How far do you agree?

“China’s economic development is most threatened by its regional disparities”. How far do you agree? (Challenges to China’s economic development)

 

Since the start of reforms in 1978, spectacular economic growth and poverty reduction in China have been accompanied by sharp rises in inequality and increasingly frequent manifestations of social tension through unrest of various types. In response to these rising inequalities, an explicit objective of “harmonious development” was adopted by Chinese governments in 2005, with a key dimension of harmonious development being a balanced development across regions. Hence, it could be seen that regional disparities, if not resolved, could pose a major threat in slowing the country’s economic growth rate is also threatened by other equally important factors such as the sustainability of its cheap labour, ageing population, its property bubble and its bad debts.

 

  • Regional Disparity

Regional disparities pose a major threat to China’s growing economy as protests and unhappiness among the citizens may cripple the economic development. With location advantages, the increased investment and tax breaks made the coastal regions more attractive to both foreign and domestic companies. In less than 2 decades, China has become the largest recipient of FDI among developing countries from a virtually closed economy in the late 1970s. As a result, the coastal regions experienced much more rapid growth, widening the coastal-inland gap in the reform period since the 1970s. Since China’s economic growth success is not equally shared among its huge population, the rise in food and China’s property prices has made life very difficult for China’s poor and in turn, has resulted in increased social tension and protests against the government whereby up to 300-500 protests are occurring in China each day as of 2014. Therefore, the problems stemmed from regional disparities could act as obstacles to continuous economic growth which the Chinese government needs to observe closely.

 

  • Sustainability of Cheap Labour Costs

Nonetheless, other equally important factors such as the sustainability of cheap labour cost, could also pose a great threat to the economic development in China. For decades, China’s economy has prospered tremendously, being termed as the “manufacturing hub” of the world. However, a large part of China’s successful growth is because of a massive supply of cheap labour, with workers from rural parts of the country migrating to the cities to find employment and also attracted many multinational corporations such as Apple and Microsoft to move manufacturing operations to China. However, China’s sustainability of cheap labour costs proved to be short lived whereby many foreign manufacturers are downsizing or leaving the country due to an increase in the supply of low cost/low quality products as well as the increase in labour costs in China in recent years. For instance, Microsoft have been shutting down its factories in China, and with plant closures in Beijing and Dongguan, resulted in 9,000 job losses that made up half of the 18,000 announced in 2014. However, this is not a surprise as in any developing economy where the supply of cheap surplus labour starts to fall and the bargaining power of workers rises.

 

  • Ageing population

Another potential great threat to China’s economic development is that the ageing population may hinder the economic progress significantly. Over the past 30 years, China’s total fertility rate has fallen from 2.6%, well above the rate needed to hold a population steady, to 1.55% as of 2015. On top of fewer children being born, China is ageing rapidly, with 10.5% of its population being over 65. This means that China is likely to grow old before it grows rich, making it the first major economy to encounter such a problem. Furthermore, an ageing population would also mean that the number of people coming towards the end of their working lives would significantly increase, reducing China’s manpower which affects its economy. Hence, with an ageing population, the reduced working population in China could slow down economic development significantly.

 

  • Bad debts by local governments

Bad debts that is held by local government is also a major threat to the country’s economy. Over the years, the debts accumulated by local governments were built up to fund public works, which were supposed to be funded by the central government before the financial crisis struck in 2008. However, after this crisis, the Chinese government went on an unprecedented borrowing binge and has been struggling to clean it up ever since. As of 2015, China’s debt to GDP ratio had reached record high, with it being 250% of its total GDP. This ultimately poses as a huge threat as should its debt not be reduced, it would only result in fatal consequences such as derailing state-owned banks, triggering a systemic crisis as banks are closely linked to the government.  As such, the debt by the local governments poses a major threat to China’s future economy. If it does explode, the central government will have to step in and help.

 

  • Property Bubble

Inflated by high end speculation and the flow of cheap money, China’s property bubble seems to keep on growing and now it’s nearing its popping point which could cause a collapse in its economy. Chinese huge property bubble continues to expand spectacularly and remains central to its economy, accounting for some 10% of its total GDP as of 2013. As such, the government must, once again balance the need to cool the market, clamping down on speculative activities, while not damaging economic growth. Hence, the possible imminent property bubble burst could threaten the country’s economic development.

 

In conclusion, upon analyzing the various possible factors that could affect the economic development of China, it can be observed that although regional disparities poses a major threat to the country’s economy,  the combination of a smaller workforce and a rapidly ageing population further pose a double whammy to China’s economy.

How effective is China in managing the challenges to sustainable economic development?

How effective is China in managing the challenges to sustainable economic development?

Since Deng Xiao Ping’s economic reforms in 1979, China has emerged as one of the fastest growing economy in the world, and eventually being the 2nd largest economy in the world. Despite China having a relatively high Gross Domestic Product (GDP) as compared to other countries, in recent years, China’s economic growth has slowed down to a “New Normal”. As such, there are many challenges in which China has to manage in order to sustain its economic development. However, China could seem to be not effective in managing the challenges to sustainable economic development by looking into these different aspects namely, the social, economic and political factors.

 

  • Widening income disparity

China can be argued to be ineffective in managing social problems such as the widening of income disparity given that it is still widening over the years. With China emerging as the world’s 2nd largest economy with tremendous economic growth, it has inevitably led to greater income disparity and the widening of the urban-rural divide given that this economic growth success is not equally shared among its huge population. Furthermore, this eventually caused unhappiness amongst the rural people as while the urban elites continue to get richer, those living in the rural areas continue to struggle due to the rising cost of living and thereby, would not be able to afford any good and services. This inevitably affects China’s economic development given that consumption levels as a whole would be lowered due to the difference in consumption levels between the urban and rural areas. Thus, this poses as a huge challenge that China needs to address in order to prevent a spill over effect of consumption levels which would eventually affect China’s GDP and economic development. However, despite measures taken by the government such as the Income Inequality Reform Plan in 2013, income disparity still persists and worsened over the years, whereby in 2015, the GINI coefficient for national income was 0.462, one of the worst in the world. Thus, in this case, China has not been effective in managing the social challenge to sustain its economic development as the income gap still continues to widen.

 

  • Inflation

China can be argued to be ineffective given its lack of capability to curb inflation. Inflation is defined as the general increase in the general price levels and is another challenge for China to sustain its economic development as inflation would cause a decrease in consumption levels and thus, result in a slower economic growth. Therefore, inflation poses as a huge challenge to the sustainability of China’s economic development given that China needs to re balance its economy by boosting consumption because the country cannot rely on exports alone to drive economic growth. However, despite measures put in place in order to curb inflation such as raising the amount of cash banks must keep in reserve to 18½% of the money they have on deposit in order to mop up excess cash floating around the economy, China has not been effective in managing inflation to sustain economic development as inflation rates continue to rise over the years with China’s inflation rising 1.9% as of September 2016. Hence, China is not effective in managing inflation to sustain economic development as although it has measures to cope with inflation, inflation is still seen as a challenge in China, and not yet being resolved.

 

  • Ineffective in managing its environmental problems

China is ineffective in managing its environmental problem as China is using large amounts of coal due to inability to secure a long term energy source for itself, as a result, unable to sustain its economic development due to loss in trade because of environmental problems. China’s heavy reliance in coal as an energy source has led to a surge in air pollution and greenhouse gases given that China’s coal-fired power plants are one of the main causes of the rapid increase in greenhouse gases and emissions, being the world’s largest after the US. This bad environmental record of China’s has hurt the bilateral ties with its neighbours such as South Korea and Japan. In 2013, not only did the South Korean media began to refer to the smog making its way from China as “air raids” , but Japanese studies too claim that air pollution from China is responsible for the high level of mercury deposit in the iconic mount Fuji. Furthermore, in 2013, researchers claim that China is responsible for 40% of Tokyo’s annual average PM2.5 levels and 60% of Kyushu’s. Although China has imposed new laws to close down any coal factories which exceeds the amount of harmful pollutants into the air, up till today many coal factories are still up and running. Furthermore, given that relations in the region are already sufficiently strained over issues such as the Senkaku/Diaoyu Islands and air space in the East China Sea, the inability to resolve its environment problems would only serve to harm relations future, should toxic air continue to migrate across China’s borders. Therefore, not only does China has to overcome this challenge of improving the energy source of its country, but to improve its ties with other countries so as to increase its exports with them in order to sustain its economic development.

 

  • Boosting the country’s economy

However, in certain aspects China can be argued to be highly effective in sustaining its economic development. This is because China can be seen to be effective in maintaining its economic development through the maintaining of the economic stability that it has achieved. With Deng Xiao Ping’s Open Market Policy, China’s economy has seen tremendous growth in GDP and despite it slowly down in recent years, reaching a “new normal”, it still led to the improvement in the standard of living of the Chinese citizens today whereby people have more disposable income. Furthermore, China has managed to lift a total of more than 800 million people out from poverty as of today and has been effective in reducing unemployment rate whereby in 2015 China’s unemployment rate is 4.04%. In addition, Xi JinPing also pledged in the 13th Five Year Plans to end poverty in China by 2020, lifting the remaining 70-80 million people who permanently fall below the poverty line in China. Therefore, with lesser poverty and unemployment, not only does it improves the lives of the people as with employment, people would also receive income and in turn have more disposable income to spend. Thus, allowing them to be able to afford goods and services, increasing consumption levels which improves the country’s overall GDP and economic growth. As such, the CCP is effective in maintaining its economic development given its introduction of newer plans to reduce poverty rates and maintain and reduce unemployment rates. Therefore, in this aspect, the CCP can be argued to be highly effective.

 

  • Effective in international relations

Furthermore, China is indeed effective in managing its challenges in sustaining economic development as in terms of international relations, China can be seen to be making an effort to manage good trading relations with the US. Initially, the relationship between China and the US got off to a bad start at 1949 and slowly worsened, however, in recent years with China becoming the 2nd largest economy in the world, China’s relationship with the US had changed for the better, allowing China to see eye to eye with the US through economic cooperation such as trading and as of 2015, China is the largest goods trading partner of the US. However this cooperation does not come without any challenges, no matter how much China may find distaste in the actions of the US, it cannot afford to severe these ties for the sake of its own modernization due to intensive US investments. Similarly, the US cannot take such ties for granted, with China being the US’s largest foreign creditor today. Likewise, China recognizes its value towards US and thus exploits its economic role in ensuring that its own interests are sustained. Therefore China is effective in managing its challenges of maintaining good relationship with the US and sustaining its economic development.