Global Economics & Political economy

ASSIGNMENT # 01

The development strategy of China post Deng Xiaopings assumption to power

Submitted to Saleem Raza Sahib

Faculty, Department of Management, IBA, Karachi

Prepared by

Mirza Arshad Baig EMBA PS-IX

Seek Truth from facts Black or white, so long as it catches a mice, it is a good cat Deng Xiaoping

Background Deng Xiaoping was born on Aug. 22, 1904, in Guangan, Sichuan province, China. He was a great Chinese communist leader, who was the most powerful figure in the Peoples Republic of China from the late 1970s until his death in 1997. He abandoned many orthodox communist doctrines and attempted to incorporate elements of the free-enterprise system into the Chinese economy. Deng had full control of the Party and the government by 1982. He wanted to make important changes so that China could compete West in consumer goods and industrial production. Even though Deng wanted to put in place Western policies he was still a communist and made sure that the political system remained communist. Deng Xiaoping launched what he called a "second revolution" that involved reforming China's declining economic system and "opening up to outside world." The market-oriented economic reforms launched by Deng were described as "Socialism with Chinese Characteristics." Deng insisted the reforms were not capitalistic: "I have expressed time and again that our modernization is a socialist one," he said. Dengs policies have been called radical pragmatism. Deng himself called it crossing the river by feeling for the stones and the policy in its early stages was called the the household responsibility system. The reforms set in motion one of the longest sustained economic expansions in history; three decades of annual growth near 10 percent.

The Deng era is known in China as the Period of Reform and Opening. Deng needed great political skill and patience to get his reforms past hard liners in the Chinese Politburo. The Deng reforms decentralized the state economy by replacing central planning with market forces,

breaking down the collective farms and getting rid of state-run enterprises. One of the most successful reformsthe "within" and "without production plansallowed businesses to pursue their own aims after they met their state-set quotas. Enterprises and factories were allowed to keep profits, use merit pay and offer bonuses and other incentives, which greatly boosted productivity. In the Deng era there was a shift from central planning and reliance on heavy industry to consumer-oriented industries and reliance on foreign trade and investment. The 1978 reforms included efforts to boost foreign trade through the establishment of 12 state companies to control imports and exports and the creation of Special Economic Zones (SEZs) along China's southern coastline. In 1982, communes began to be dismantled and peasants were allowed to grow and sell produce. In 1985, tariffs were cut from 56 percent to 43 percent beginning the long, gradual reduction of import barriers.

MAJOR COMPONENTS OF ECONOMIC REFORMS

1) AGRICULTURE Beginning in 1978 several major institutional reforms have been undertaken. First is the adoption of the household responsibility system in agriculture. Collective farming under the Commune system introduced by Mao in 1958 in his Great Leap Forward Movement was being practiced. Farmers worked as a team consisting of some forty persons. A farmer could not get extra reward by working harder because all members of the team would share the additional output due to his additional labor. Chinese farmers deserved credit for initiating reform in agriculture. Some farmers realized that if they farmed separately the team could produce more in total and still delivered the same amount of output required by the procurement system for government distribution of agricultural products in the economy. The Commune system was changed as the team was reorganized by distributing its land to individual households to farm separately, each getting the additional reward for additional labor after delivering a fixed amount of output to the team for delivery to the government procurement agencies. Such practice was introduced and spread in many areas of the country. In 1978, Deng recognized its beneficial effects and adopted it as a national policy and called it the (HRS) household responsibility system. Agricultural output increased rapidly in China. The farmers became richer. The success of reform in agriculture served as the foundation of reform in other sectors not only by increasing the supply of food but also by changing the ideological thinking of Communist Party members in support of a market economy. 2) STATE-OWNED ENTERPRISES In this case, the following institutional changes were adopted and carried out step by step. The first was to give state enterprises some autonomy in production, marketing and

investment decisions rather than simply carrying out the decisions under a system of central planning. The experiment began in late 1978 with six pilot enterprises in Sichuan Province. By the end of June 1980, 6,600 industrial enterprises that were allowed to make such autonomous decisions produced about 45 percent of the total output of all state industrial enterprises. The second was to make them financially independent, allowing them to keep the earnings as their own profits after paying taxes to the state, rather than as revenue belonging to the government. The third was to introduce a responsibility system similar to the household responsibility system in agriculture, first to selected parts of the enterprise under the important reform Decision of the Central Committee of the Communist Party in October 1984, and later to an enterprise in 1987. Under the responsibility system, a part of an enterprise was allowed to keep the remaining profit after surrendering a fixed amount to the enterprise controlling it. In 1987, further reform of the state enterprises was carried out under the contract responsibility system. After paying a fixed tax to the government having jurisdiction over it, each state enterprise was allowed to keep the remaining profit for distribution to its staff and workers and for capital investment. Within one year in 1987, almost all state enterprises were under the new contract responsibility system. Significant steps on state enterprise reform were taken in the late 1990s. The government was to give up ownership and control of small and medium sized state enterprises while keeping the control of large enterprises. Shares were issued for a small or medium enterprise, to be purchased by its managers and staff. The state would give up most of its shares. This would help an infusion of to the enterprise. In many instances, the incentives provided to the workers who share a part of the profits were significant. 3) THE OPEN-DOOR POLICY Under the open-door policy foreign trade and foreign investment are encouraged. Chinas economy was essentially a closed economy before the economic reform. In 1978, the total volume of its foreign trade, or the sum of the values of its exports and imports, amounted to only 7 percent of its national income. Deng Xiaopings open-door policy encouraged the opening of China to foreign imports and the promotion of exports. By 1987, the volume of foreign trade increased to 25 percent and by 1998 to 37 percent of gross domestic product. A number of institutional reforms were introduced in the administration of foreign trade, beginning with strict control for the purpose of providing exports to pay for the imports required under central planning. The provinces were given autonomy to promote exports. Trading companies were established in cooperation with industrial enterprises manufacturing products for export to facilitate decentralization of trading activities. These companies were responsible for their own profit and loss. Special treatment was given to exporting companies and enterprises to encourage them to export. They were allowed to retain part of the foreign exchange they earn and to obtain

special loans in RMB or in foreign exchange for short-term financing or long-term capital expansion. Turning to foreign investment, the second component of the open-door policy, we observe that the China makes an almost 180 degree turn from regarding it as a form of capitalist exploitation to utilizing it as an important engine for economic development. 4) SPECIAL ECONOMIC ZONES (SEZS) THE ENGINE TO CHINAS ECONOMIC GROWTH In the mid-1980s, the "coastal strategy" was emphasized. Agricultural reforms were extended to the industrial sector and manufacturing centers, modeled after those in Taiwan and South Korea, were established in coastal areas of China, with different strategy. The heart of Deng's economic reforms was the establishment of Special Economic Zones (SEZs) along China's southern coastline. Here Chinese businesses and foreign investors were lured with chances to make huge profits and incentives such as low taxes, cheap land, cheap labor and comparative economic freedom. The SEZs and industrial clusters have made crucial contributions to Chinas economic success. Foremost, the SEZs (especially the first several) successfully tested the market economy and new institutions and became role models for the rest of the country to follow. Together with the numerous industrial clusters, the SEZs have contributed significantly to national GDP, employment, exports, and attraction of foreign investment. The SEZs have also played important roles in bringing new technologies to China and in adopting modern management practices. It is estimated that as of 2007, SEZs (including all types of industrial parks and zones) accounted for about 22% of national GDP, about 46% of FDI, and about 60% of exports and generated in excess of 30 million jobs. In 2007, the 54 HIDZs hosted about half the national high-tech firms and science and technology incubators. They registered some 50,000 invention patents in total, more than 70 percent of which were registered by domestic firms. They also hosted 1.2 million R&D personnel (18.5 percent of HIDZ employees) and accounted for 33 percent of the national high-tech output. Over the 15 years since the formation of HIDZs, they have accounted for half of Chinas high-tech gross industrial output and one-third of Chinas high-tech exports. In addition, the ETDZs are also responsible for another one-third of Chinas high-tech industrial output and exports. 5) THE BANKING AND FINANCIAL SECTOR Before economic reform, the Peoples Bank was a mono-bank that had branches to accept deposits from the public. Its other functions were to issue currency and to extend loans to state enterprises according to the need specified and approved by the planning authority. In 1983 the Peoples Bank was nominally transformed into a central bank. Specialized banks, including the Industrial and Commercial Bank of China, Agricultural Bank of China and the Peoples Construction

Bank of China, were established and given some autonomy in the extension of credits in the early 1980s in the same way that state industrial enterprises were given autonomy to make production decisions. This led to the rapid increase in the supply of currency (since the central bank had to honor the loans extended by the specialized banks) in 1984 by 50% and an inflation rate of 8.8% by the overall retail price index in 1985. Achievement's of the Deng Reforms Some have called Deng Xiaopings reform and opening policy the greatest poverty-reducing program in history. It not only launched a period of economic prosperity in China it lifted 200 million people out of poverty. At the time the reform and opening policy was approved China was still suffering from famines and the per capital GDP of China was 381 yuan. In 2007 it reached 18,900 yuan ($2,760). GDP growth in the PRC has averaged more than 9 percent since 1989 and reached as high as 14.2 percent in 1992 and 2007, according to the World Bank. Savings increased 14,000 percent and exports went from $10 billion a year to almost $1 trillion between the 1980s and 2000s. An estimated 400 million people have been lifted out of poverty; perhaps 100 million people have been booted up the middle class; and China rose from an economic backwater into the world's third largest economy. China has the fastest growing economy in the world for many years now, an astounding fact when you consider how large the country is. It has managed to maintain a 10 percent growth rate through the 1980s, 1990s and 2000s and did not suffer to much from the Asian Economic Crisis in the late 1990s and a global slump in the early 2000s. Growth has averaged over 10 percent for the last 30 years. It was 9.4 percent between 1978 and 1995. It was 11.2 percent between 1990 and 1998 and 11.2 percent between 1990 and 1998 and just under 10 percent between 1999 and 2007. Chinas growth rate has been five and six times higher than the growth rate in the United States, Japan and the major countries in Europe. The only countries that have posted similar growths rates over extended periods of time in recent years have been Japan in the 1960s, 70 and 80s and South Korea in the 1970s, 80s and 90s. If the Chinese economy continues growing a rate of 9 percent it will double every ten years. Key policy developments that allowed China to sustain growth over the whole period since the early '80s 1. Decentralized the state economy by replacing central planning with market forces. 2. Breaking down the collective farms and getting rid of state-run enterprises. 3. The "within" and "without production plansallowed businesses to pursue their own aims after the met their state-set quotas. Enterprises and factories were allowed to keep profits, use merit pay and offer bonuses and other incentives, which greatly boosted productivity.

4. Shift from central planning and reliance on heavy industry to consumer-oriented industries and reliance on foreign trade and investment. 5. The export-led growth strategy used successfully by the Four Asian Tigers beginning with Japan in the 1960s - 1970s and other Newly industrialized counties Conclusion Deng restored China to domestic stability and economic growth after the disastrous excesses of the Cultural Revolution. Under his leadership, China acquired a rapidly growing economy, rising standards of living, considerably expanded personal and cultural freedoms, and growing ties to the world economy. Deng also left in place a mildly authoritarian government that remained committed to the CCPs one-party rule even while it relied on free-market mechanisms to transform China into a developed nation. Deng Xiaoping launched China on the path of economic reform. China is now the worlds second largest economy and its first largest trader. Deng decided to step down in 1992, China, however, was still in the era of Deng Xiaoping. He continued to be widely regarded as the "paramount leader" of the country, believed to have backroom control. Deng was recognized officially as "the chief architect of China's economic reforms and China's socialist modernization". To the Communist Party, he was believed to have set a good example. He broke earlier conventions of holding offices for life. He was often referred to as simply Comrade Xiaoping, with no title attached. He was died Feb. 19, 1997, at Beijing.