Factors that influenced China's economic growth

Author: Iloka Benneth Chiemelie

Published: 2/3/2014

1.0 INTRODUCTION

The rise of China as a major global economy within the space of about three decade is usually described by analyst as one of the greatest economic success stories in human history (considering the change from 1979 when the economic reform started in the country to 20102), as the country’s real domestic product (GDP) grew at an average rate of 10% per annum for about more than 3 decades (Wayne, 2013). It has been estimated that about 500 million people in China have been raised from absolute poverty as a result of the economic reform. In that case, China has successfully emerged as a global economic power, and is presented the largest manufacturer, exporter of merchandize, and holder of the highest foreign exchange reserve in the world (Wayne, 2013). Presently, China is the second largest economy in the world after the United States, and some of the analysts have already began to pinpoint the country as having the potential to take over as the world’s largest economy in about 5 years or so. However, these analysts should not be fast believed but instead their statements should be subjected to critical open debate because on a per capital basis (that is the value used to measure the standard of living in a country), USA is still by far better than China (Wayne, 2013). It can also be argued that this is not a reason for China not to take over the USA because there are also countries with per capital basis (e.g. UK, Germany, France etc.) that China is presently toping in terms of economic power.

In view of this increasing economic growth that currently puts China in a comfortable position to become the world’s largest economy in few years, this paper will explore factors that have led to such success. The factors to be considered in this paper will be political – government policy and reforms, and how they have impact on economic development, economic – changes in economic policies and establishment of ties with global economies and how they have impacted on growth, and technological – the influence of technological development on production and output, and how it has influenced economic development. Additionally, this paper will present a critical review of all these factors and point out areas the country is not finely tuned for sustainable development. As such, this paper will present recommendations for future developments on how China can reposition itself to ensure sustainable economic growth. Thus, this paper is basically divided into two, the first section is a review of the factors that has fine-tuned China’s economic development and the second section will involve recommendations on how the company can presently increase its economic growth and ensure sustainable growth in the future.

2.0 ECONOMIC FACTORS THAT HAVE INFLUENCED CHINA’S ECONOMIC GROWTH

From 1979, China made a number of economic reforms. The Chinese central government brought in price and ownership incentives for farmers, and this allowed them to sell certain amount of their crops in the free market (Wayne, 2013). Additionally, the government created four economic zones that were specialized along the coast for the main objective of attracting foreign investments, increase exports, and importing high-tech products into the country. Following these stages are other reforms such as decentralized policy making in the economic sectors, especially in trade. Provincial and local governments were given the economic control of various enterprises, and this generally increased the freedom of operation and competition on free market principles, rather than the more dictatorial approaches witnessed under the guidance of state planning. Also, citizens where encouraged to be entrepreneurs and start up their own businesses (Wayne, 2013). Coastal regions and cities where mandated to start up development centres in their cities, and this allowed them to experiment the idea of free market reforms and to offer tax and trade incentives that will attract foreign investments. Other reforms include the control of price by states on numerous products and this increased purchase. Liberalization of trade is also considered a major key in China’s economic success as it removed trade barriers and encouraged increased competition as a well as increased foreign direct investment (FDI) into the country. These change in economic policies yielded favourable outcomes as can be seen from the figure (1) below.

Figure (1): Average Real GDP among Major Global Economies (2008-2011)

From the above figure (1), it is clear that earlier discussions from Wayne (2013) means that China has subsequently adopted the right economic reforms and this have helped the country rip numerous economic benefits. The diagram illustrates that China is the largest economy in terms of real GPD from 2008 to 2011. Further, these strengths earlier claims by analysts that China could possibly over take USA in a couple of years to become the world’s overall largest economy. Thus, this paper will proceed to study political factors that influenced such economic reforms and what it holds for further economic growth in the Chinese economy.

2.1 POLITICAL FACTORS THAT INFLUENCED CHINA’S ECONOMIC REFORM

Professor Clem (2009) presented a condensed analysis of the political reforms that powered Chinese economic development. In his analysis, the professor stated that Deng Xiaoping, the then President of China is a charismatic man that is characterized by realism and gradualism, who believes in the importance of trial and error. He (President Deng) made the proposal of a new institutional structures that were tested wherever possible (regions, locality or sectors of the economy) in order to determine their chances of improving the economic development of China. The  social and economic impacts of these approaches where then observed, and it they were found to yield positive results, these policies will be enacted into the economy and modified where necessary in order increase the experience obtainable. This is a method the President referred to as “crossing the river by touching stones.”  A metaphorical expression used to inform the public that business is never guaranteed, and the stone (failure) will serve as obstacle sometimes in the process of undertaking the business (crossing the river). The Central Committee of the Chinese CCP agreed in 2008 on basic agricultural land reforms that has the potentials (if fully implemented) of making agricultural lands become private property (World Bank, 2008, p.19).

Roland (2000, pp.63-64) noted that this reform is significant for China’s economic development. This he argued by flashing right on Williamson’s (1975) suggestions that such approach will shift the management from centralized to decentralized and it will increase the efficiency which is naturally required for improved economic development.

There is still a question of how Deng Xiaoping was able to gain the support of leaders of the CCP for his reform agenda. The first answer can be seen in the 1978 policies of the CCP which was designed to delivery improved economic growth (Clem, 2009). Secondly, Deng also adopted political tactics that analysts say helped to improve over understanding between him and the leader. In this tactics, he stressed on the main objective of preserving the dominance of the CCP in china, and the best way to do so was to secure the position of the Party’s leaders which made that they always supported his approach to economic development. In his quest for dominance, political liberalism was not tolerated in the CCP party and anybody who supported political liberalism will face severe consequences such as the (Hu Yaobang, 1987) such as the two CCP ministers who were dismissed from office because of their support for economic liberalism, although they also supported Deng’s economic policies (Zhao Zhiyang, 1989; Qian and Wu, 2008, p.57).

His successors, bothJiang Zemin and Hu Jintao also continued with this economic approach which was built on dominating every aspects of China’s economy. This approach led to changes in government policies that were geared towards ensuring that China dominates the global economy in essences, but adopting scientific and technological progress and improved labour quality (The Research Department of Party Literature 1991, p.305).

Therefore, it is clear that a political reform which challenges the other parties and presented China as the best the world has got was behind their quest for progress and is still the country’s guiding force as the present government continues to challenge all economies in terms of performance, development and market size. It can then be stated that this political approach further strengthens the possibility of China becoming the largest economy in no distance future because what the government wants is complete and total domination of the global economy.

2.2 TECHNOLOGICAL POLICIES THAT HAVE HELPED ENABLE CHINA’S RAPID ECONOMIC DEVELOPMENT

Technological development in China is based on 5-years plan and the first of such was in 1956. Up till 1965, China adopted a centralized planning which was learned from the Soviet Union, although it was not entirely the same as that of the Soviet Union. Such centralize approach meant that the research and development (R&D) was bureaucratic and hierarchical. While China developed both nuclear and ballistic missiles as of that period, the centralized planning haunted technological and scientific developments severely(Sylvia and Magnus, 2007).

With Mao’s death, Deng Xiaoping ascended into power and modernized China’s economy in four sectors as agriculture, industry, science and technology and national defence. Deng Xiaoping’s motto “science is the first productive force” (kejishi di yishengchan li) is the main force behind technological development in the country, and it resulted in the government changing its approach towards development by investing heavily to update China’s technologies and position the country in the new modern era of techno-capabilities that are designed towards increasing the overall productivity of the country and as such increasing its economic development (Sylvia and Magnus, 2007).

Figure (2): R&D Intensity in 2004 and Annual Average Growth Rate (AAGR) of R&D Intensity, 1999–2004

Source as adapted from: Eurostat (2006)

The figure (2) above shows that China’s R&D expenditure as a share of the country’s GDP has experienced rapid growth over the years, and is by far the highest when companied with other developed countries such European countries, USA and Japan.Such an increase in government’s expenditure on research and development now means that China is a country that is capable of developing or innovating any technology on its own. In terms of productivity, it has enhanced production process as the country is presently the largest manufacturer in the world.

From the above analysis, it has been illustrated that China has changed numerous approaches to its political, economic and technological policies. All these changes are in line with pioneering the country towards increased economic growth which is the guiding principles of Deng’s quest for total dominance of China in the world. The government have enhanced FDI in the country, improved technological development and changes government pokies.

Additionally, analysts have questioned the possibility of China overtaking the United States in terms of becoming the overall largest economy across the globe. While there might be doubts to such possibilities, the figure (1) and (2) clearly shows that China has already over taken the United States in terms of economic performance from 2008 to 2011 and investment in research and development. If that is the case, then the outlook is such where it is highly possible that China will overtake the US in few years if they continue this tremendous economic growth.

However, the analysis also showed that China have not fully repositioned itself from a centralized to decentralized management and opened its economy fully for the world to come in terms of reshuffling of its communist policies into a more liberal policy that will be beneficial to all parties. While this can be considered a guiding principle of the country’s ruling party (CCP)’s guest to make China a globally dominant force, they also pose issues in terms of ensuring sustainable economic development and growth. As such, this paper will proceed to discuss the issues that could possibly be faced by the country in near future and make recommendations on how China can change its policies to better ensure sustainable business development and economic growth that will potential make them the overall largest economy in the world in the nearest future.

3.0 RECOMMENDATION FOR MAINTAINING SUSTAINABLE ECONOMIC GROWTH IN CHINA

From the above analysis, it is clear that China is currently in a positive economic sphere, considering the fact that reforms in economic, political and technological policies in the country have subsequently increased their overall economic performance and makes China the second largest economy in the world with the biggest exchange reserve. However, the question is how can China sustain such a tremendous growth?

The modern business environment is increasing becoming dynamic and challenging as a result of globalization, technological advancement and increased value chain management and relationship which are all used in competitive benchmarking. Thus, China is not alone in the battle to become the world’s best. Flashing backing at the figure (1) above shows that China is closely followed by Indian, Brazil and Russia. Thus, there is a need for China to clearly identify its competitors and draft measures that will help in benchmarking its products and services in the global market. As such, it is recommended that China should continue to benchmark other countries in terms of product and service offerings.

Since competition is rising on the global stage, which numerous economies becoming liberalized, it is important that countries seeking to increase their economic growth should have: quality beyond their competitors; pioneer technological development; and price their goods and services below their competitors (Watson, 1993).

In order words, the country must seek to become better, faster, and cheaper than their competitors as this will increase their benchmarking by recognizing it as the force for increased improvement and innovation. In that case, the model in figure (1) below is recommended as the benchmarking approach china should adopt for increased economic development.

Figure (3): recommended benchmarking approach

From the figure (3) above, the first approach that China must adopt is to increase the quality of their products. Currently, Chinese products are seen as low quality and low tech products (Joshua, 2007). This is a very serious disadvantage to branding made in China products and the government must first look into. It is important that China rebrands and repositions its country specific products in the world as being high-tech and high-quality. This is because, it will increasing their trading capabilities in across the world. Low quality products are generally associated with low value and if such image is not changes, it could lead to other competitors such as Indian, Brazil or Russia benchmarking China in that aspect by positioning their products are being superior and offering higher value.

In the second aspect, it is stated that China must pioneer technological development in order to benchmark other countries by offering highly advanced products and services. While this paper illustrated in figure (2) that China is heavily investing in Research and Development (R&D0, it is still unfortunate that Chinese products are considered as low-tech (Joshua, 2007). Such considerations can be linked back to the fact that Chinese products are being considered as low quality. This is because; low-tech is correlated with low quality. This means that when you don’t have the necessary production technologies to increase efficiency and production of reliable goods and services, it is expected that the poor production technologies you currently have will only yield low quality products. As such, China needs to rebrand itself by pioneering development of new technologies so that the world will recognize them as technologically self-sufficient and capable of meeting overall customers demand in technological development.

Finally, the last approach is suggesting that china should price its products and services lower than that of their competitors. Currently, it must be stated that Chinese products are one of the lowly priced in the world, and this can also be linked to their increased economic development. However, it can also be viewed as the reason why Chinese products are perceived as low quality and low-tech. This is because, the customer will tend to associated the low prices to poor production materials and overall low quality (which is usually the case) when compared with higher priced products. Price is a direct evaluation of quality, and China must bear that in mind when pricing its products and services. However, in order to ensure continued improvement in sales, products must be priced lower than that of competitors to encourage customers to increase brand.

Thus, it is expected from the above analysis that is China will be able to increased its product qualities, pioneer technological development and price its products lower than that of its competitors, the country will be able to ensure sustainable economic growth.

3.1 CONCLUSION

From the above analysis, it has been illustrated that there are numerous factors which influence the economic performance of a country. While economic deals with overall financial performance, it would be unjustifiable to link such with only economic factors as illustrated in the case of China.

It was shown in this paper that China’s rapid economic development is a result of political, economic and technological factors, as well as other factors that might not have been discussed in this paper. Thus, in order to maintain sustainability in its economic development, it is important that the country doesn’t just look into its financial performance alone but instead consider other aspects of purchasing behaviours influencers that determines customers’ decision to choose one brand other the other.

Thus, it was recommended above that is China wishes to sustain its present economic development (and possibly increased it as well), the country must rebrand its self as high-quality product offering nation, increase its involvement in technological development by pioneering the creation and innovation of new technologies and price its products below that of their competitors. All these factors put together was shown above as being able to benchmark China over its competitive and build a more sustainable economy in the country.

4.0 REFERENCES

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Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York: The Free Press.

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