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Examine How and Why The Economy of China has Changed in the Last 30 Years Essay Sample

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Examine How and Why The Economy of China has Changed in the Last 30 Years Essay Sample

Through Mao’s reign, China became increasingly isolated from the rest of the world. Political policies such as the Great Leap Forward and the Cultural Revolution had a major, and in some people’s opinion, negative influence on China’s development. One of the main problems was the difficulty of managing a huge economy centrally.

After death of Mao in 1976, Deng Xiaoping (the new leader) introduced the Open Door policy, which was designed to overcome China’s isolation from the world economic powers. He recognised that central planning was ineffective as there were too many tiers of responsibility. Deng noticed that the world and neighbouring nations were developing quickly, and leaving China behind. China moved towards a socialist market economy. Today China’s leaders are focused and determined on ‘economic growth at all costs’.

Between 1949 to the late 1970’s, manufacturing in China was undertaken by mostly ‘State-Owned Enterprise (SOE’s). These were mainly heavy industries, for example, power (Shenzhen Energy), iron and steel. Once Deng took over in 1978, focus turned to productivity, which forced SOE’s to reform. A key incentive towards independence in the market economy was enabling SOE’s to keep some of their profits. Industry quickly replaced agriculture as the leading growth sector in 1980’s as large SOE’s improved management and efficiency, whereas smaller SOE’s were privatised. This led Chinese firms to westernize. For example each work unit had a director or manager with a clear responsibility (a change to the old ‘revolutionary committees’ set up during the cultural revolution). They also started to hollow out work to improve technological infrastructure and acquire modern ‘know-how’ which can then be transferred into domestic firms. Many businesses calibrate through this success by the use of Joint Ventures, having accepted more efficient management and business strategies of global firms. Good examples of these are United Technologies and Caterpillar that have been a great success.

The government also started to allocate resources to these SOE’s to achieve max benefit from investment, as decentralisation was essential. The state started to control the prices and strong links developed between high-level state officials and the SOE’s.

The SOE reform has led to huge success, with 40% of businesses still public sector. Industrial output has increased by 13% per year as well as improvements in technology, management and efficiency, SOE’s have attracted TNC’s as partners, which brings western experience and skills-which can be taught to Chinese. FDI (foreign direst investment) also increased in China from $3.5billion in 1990 to $93.7billion in 2007. Many believe this success was due to the slow speed of these reforms as the firms had to time o adjust to the change.

However, national and provisional governments have been concerned about the social effects of unemployment as SOE’s become more efficient. Housing, health, services and education used to be provided by the workplace. The reforms are gradually removing these responsibilities from the SOE’s and people connected with state firms now have no access to state housing and there are minimal welfare and unemployment benefits.

Ownership is still an issue for SOE’s. Ownership by ‘all the people’ in reality meant a sense of ownership by none of the people. There is still much government intervention, and SOE’s objectives are only partially market orientated. If managers do what the state officials want, and things go wrong, the losses are made up with bank loans that don’t have to be paid back.

Even though industry replace agriculture as leading growth sector, agriculture was still very important to Deng’s reforms. He encouraged enterprise and the motive for profit was encouraged. After the failure of collectivising farming by Mao, resulting in over 50 million deaths, Deng divided up farmland between households under the new Household Responsibility System which households were given a 15 year contract to farm land. They were encouraged to invest and manage their land effectively. Pesticides were used and responsibility for system of agriculture was encouraged. Central government also raised the price it paid to farmers for grain and other crops, and by 1980 there was an open market for agriculture produce. The reforms revitalised the rural economy and gave peasants confidence to challenge corrupt and exploitative cadres (local government leaders). However, since that time the Chinese agriculture economy has grown slowly and is beginning to experience food insecurity. This means demand for other land, such as the ‘scramble for Africa’ is essential to feed the growing population of 21st century China.

Rural enterprises were also promoted to set up. For example small cotton production lines sprung up in rural areas and pressure to make profit was enforced by the government. This also was part of China’s export led growth idea, where production was to be increased to ensure exports were putting China on the world map and creating trade links. These growths allowed overseas Chinese TNC’s to renew their links with China and were promoted to set up in the hugely developing nation of East Asia.

However china still needed improved infrastructure and this was only going to be achieved by huge investment over a long time period. As well as infrastructure, China also needed well regulated bank systems as industry was now being reformed.

From 1979, Deng started to set up 5 specialist economic zones (SEZ’s) and 14 open cities. These offer reduced restrictions on land labour wages, taxes and planning permission to overseas firms, especially those in high technology industries which has results in the emergence and dominance of economic activity in coastal areas- which have received most of the internal investment as well as advantages of TNC’s setting up industries such as technology and imported capital. The idea was for mainly export orientated market driven large labour intensive products. However over time and success, this turned into increasing numbers of high-tech industries.

A good example of this is Shenzhen that was China’s first and one of the most successful Special Economic Zones. It was set up in 1980 to attract the foreign investment by applying special tax incentives for businesses. A good example of this is Taiwan’s largest company Hon Hai Group which has a manufacturing plant based in Shenzhen. Many foreign high-tech companies have their operations in the Science and Technology Park in Nanshan District or outside the core districts where labor and land are much cheaper. It was designed to attract foreign investors by applying special tax incentives for these businesses. Some joint ventures were also set up which was a combination of Western TNC’s and SOE’s which brought over modern technology infrastructure as well as training for new and modern skills in exchange for shares in the company. Shenzhen was also situated close to Hong Kong; knowing very well that in 16years Hong Kong’s ‘lease’ with British rule will run out. This would offer new economic partnerships offering further future economic growth.

Another initiative, which the Chinese implemented since Deng’s rule, has been TVE’s (town and village enterprises), which have been collectively owned and controlled by local cadres. Some however were privatized and these included the production of electronic keyboards for Chinese language, run by Wan Runnan. During communist reign of Mao’s leadership and during the start of Deng’s rule, private businesses were labelled as ‘practicing capitalism’, which was prohibited in communist China. However in 1982 the ideas changed and it was announced ‘as a necessary supplement to the public economy’. Many people went into private businesses in the 80’s as it was seen to pay well if hard work was put into it. An example of this was Mr Haun who left his job as a schoolteacher and became a designer at a local porcelain factory. He employed 20 staff from failing SOE factories. During the early 80’s and 90’s tens of thousands of intellectuals including teachers left their stable jobs. Chinese private economy exploded during the 1980’s and people’s opinion towards private entrepreneurs changed as they realised there was nothing wrong with earning a better life through hard work.

Within 30 years Private sector had gone from being worth nothing to $10,000,000,000 in 2007; representing 40% in national industrial output – more than public and international sectors and producing around 6 million jobs each year. But without the opening and reform policy, people like Mr Haun would never have been able to do what they were doing.

I conclude that a major factor influencing change in the Chinese economy in the past 30 years has been the Open Door policy implemented by Deng Xiaoping. This reform allowed foreign investment and business to bring over modern technology, business management and worldwide trade links to a developing part of the world. In conjunction with other specific government reforms, such as the SEZ’s and SOE’s, reforms allowed quick economic growth, still allowing time for companies to adjust to the new style of western business. I believe without Deng’s new pragmatic modern thinking, China would have been stuck in slow economic development.

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