GROWTH AND DEVELOPMENT ASSIGNMENT AANCHAL MADNANI AO20 CHINA The Introduction of Economic Reforms

Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers, which enabled them to sell a portion of their crops on the free market. In addition, the government established four special economic zones along the coast for the purpose of attracting foreign investment, boosting exports, and importing high technology products into China. Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning. Additional coastal regions and cities were designated as open cities and development zones, which allowed them to experiment with free market reforms and to offer tax and trade incentives to attract foreign investment. In addition, state price controls on a wide range of products were gradually eliminated.

Analysis of Chinas Per Capita GDP

Therefore in only slightly over thirty years China, containing more than twenty per cent of the worlds population, has moved from being one of the worlds least economically developed countries, to a position where less than one third of the worlds population lives in countries with a higher GDP per capita, and where Chinas position is rising rapidly. Checking these current price statistics against international parity purchasing powers (PPPs), which takes into account different price levels in different countries, confirms the same result. Measured by PPPs in 1980, the first year for which World Bank data is available; only 1.3 per cent of the worlds population lived in countries with lower GDP per capita than China and 73.0 per cent in countries with a higher one. By 2010 only 31.5 per cent of the worlds population lived in countries with a higher GDP per capita than China.

Per capita GDP (in $)

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1,135 949 1,042 1,274 1,490 1,731 2,069 2,651 Per capita GDP 3,414 3,749 4,428

That since 1978 China, with more than one fifth of the worlds population, has moved from being one of the poorest countries in the world to a situation where less than one third of the worlds population has a higher GDP per capita is without historical precedent. Never before in human history has such a large proportion of the worlds population advanced so rapidly.

Causes of Chinas Economic Growth

China's impressive growth is rooted in the liberalization of a surplus labor economy that has a high saving rate. The reallocation of surplus agriculture labor to industry and service sectors generates a growth effect that shows up in total factor productivity growth. Economists generally attribute much of Chinas rapid economic growth to two main factors: large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth. These two factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy.

1.LARGE SCALE CAPITAL INVESTMENT

China has historically maintained a high rate of savings. When reforms were

initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of stateowned enterprises (SOEs), which were used by the central government for domestic investment. Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings (these now account for half of Chinese domestic savings). As a result, savings as a percentage of GDP has steadily risen; it reached 49% in 2004, among the highest savings rates in the world.

60

Gross savings (% of GDP)

52 52 53 53 53 47 44 37 38 40 48

50

40

30 Gross savings (% of GDP) 20

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2.RAPID PRODUCTIVITY GROWTH

Several economists have concluded that productivity gains (i.e., increases in efficiency of operations in which inputs are used) were another major factor in Chinas rapid economic growth. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central Government, such as agriculture, trade, and services. Chinas decentralization of the economy led to the rise of on state enterprises, which tended to pursue more productive activities than the centrally controlled SOEs. Additionally, a greater share of the economy (mainly the export sector) was exposed to competitive forces. Local and provincial

governments were allowed to establish and operate various enterprises on market principles, without interference from the central government.

3.FOREIGN DIRECT INVESTMENT

One of the defining features for the Chinese economy came on the 11th of

December, 2001 when it became a member of the World Trade Organization or

WTO. The Chinese accession to the WTO meant that Chinese economy opened up more to the rest of the world and its trade with Japan and the ASEAN nations (Association of South-East Asian Nations) increased rapidly. Foreign direct

investment (FDI) in China brought with it new technology and processes that boosted efficiency. China drastically reduced its tariff rates from 16.7% in 2001 to 12% in 2002 and significant steps for reducing the number of items on its

import license or quota which was 300 in 2002 are presently underway. Notably, Indias exports to China quadrupled from less than 1% in 1995 to more 4.5% in 2003. With more free movement of goods and services in the area, Chinas neighbours were exposed to a much larger market which had a substantial effect on the reduction of production costs. This also resulted in greater flow of foreign investment to China. China had attracted Foreign Direct Investment (FDI) to the tune of US $ 44 billion in 2001 and the corresponding figure for 2002 rose to $52.7 billion.

GROWTH IN CHINA

GDP Growth Percentage

16 14 12 10 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8.4 8.3 9.1 11.3 10.1 9.6 10.4 9.2 12.7 14.2

GDP growth

The country's first production census discovered at the end of 2005 that GDP has recently been grossly underestimated as a result of a failure to take into account the rapid growth of the services sector. As a result, growth rates for 2003-2005 are now recorded at around 10% per year in real terms. Despite efforts to cool the overheating economy, the officially recorded GDP growth rate was 11.4% in 2007. In 2008 the global economic crisis began to reduce China's growth rate. In the face of forecasts that this might drop below the rate at which school leavers can be absorbed by the growing economy (7%-8%) the government decided to pump 4 trillion Yuan into the economy in the form of an economic stimulus package consisting largely of investment in fixed infrastructure and human capital. The stimulus succeeded in preventing a dramatic fall in GDP growth in 2009 and in providing a sustained recovery in 2010, when the real annual GDP growth rate rose to 10.4%. With stagnation in China's major markets in 2011 and as global conditions have deteriorated in late 2011, it seems likely that economic growth will fall to around 8% in 2012. The government does not have the option of returning to stimulus on the massive scale of 2008-2009 and has to be careful not to stoke inflation.

Major Long-Term Challenges Facing the Chinese Economy

Chinas economy has shown remarkable economic growth over the past several years, and many economists project that it will enjoy fairly healthy growth in the near future. However, economists caution that these projections are likely to occur only if China continues to make major reforms to its economy. Failure to implement such reforms could endanger future growth. State-owned enterprises (SOEs), which account for about one-third of Chinese industrial production, put a heavy strain on Chinas economy. Over half are believed to lose money and must be supported by subsidies, mainly through state banks. Government support of unprofitable SOEs diverts resources away from potentially more efficient and profitable enterprises. In addition, the poor financial condition of many SOEs makes it difficult for the government to reduce trade barriers out of fear that doing so would lead to widespread bankruptcies among many SOEs. Chinas banking system is regulated and controlled by the central Government which has used the banking system to keep afloat money-losing

SOEs by pressuring state banks to provide low interest loans, without which
a large number of the SOEs would likely go bankrupt. Currently, over 50% of state-owned bank loans now go to the SOEs, even though a large share of loans are not likely to be repaid. The precarious financial state of the Chinese banking system has made Chinese reformers reluctant to open the banking sector to foreign competition. Many economists contend that Chinas policy of pegging its currency (the Yuan), which forces the government to trade Yuan for dollars (to keep the peg at about 8.3 Yuan to the dollar), could boost the level of inflation in China at some point in the future. They also contend that the sharp increase in the monetary supply (due to the peg) may induce Chinese banks to make bad loan decisions and thus increase the level of non-performing loans. Public unrest over pollution, government corruption, and growing income inequality poses threats to social stability. The Chinese government reported that there were over 74,000 protests (many of which became violent) involving 3.8 million people in 2004 (up from 53,000 protests in 2003) over such issues as pollution, government corruption, and land seizures. Pollution in China continues to worsen, posing series health risks to the population. The Chinese government often disregards its own environmental laws in order to promote rapid economic growth. According to the World Bank, 16 out of 20 of the worlds most polluted cities are in China, and the direct costs to the economy (such as health problems, crop failures and water shortages) is estimated to be hundreds of billions of dollars yearly. Real estate Bubble. When there is positive sentiment of prosperity rumored in the economy along with low interest rates, prices of property tends to rise abnormally. Currently that bubble has burst as referred to the article from Reuters. This could be the challenge to its growth in the future also. Rising income inequality, particularly between people living in the urban coastal and those living in the inner rural regions of China, has become another source of tension. The unequal distribution of growth dividends among the people is one of the factors contributing to the differences in the income. Till date, there are approximately 150 million people in China who are living below the United Nations poverty line of 1 US dollar per day.

Furthermore, the urban per capita net income stood at 17,175 Yuan ($2,525) in 2010, in contrast to 5,153 Yuan in the countryside. The average urban to rural household per capita income ratio is 3.2 times. The government fear that the vicious circle of poverty may lead to serious social problems such as higher crime rates. Human Development Index in China shows a consistent effort on human capital in terms of its education, health and life expectancy. That means, the life of people is as miserable as it was a decade ago. This could be because of high population and no attention on the basic welfare expenditures by the state.

Human Development index

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2000 2001 2005 2006 2007 2008 2009 2010 Human Development index 0.588 0.721 0.633 0.644 0.656 0.665 0.674 0.682

INFLATION Price rise has been the most unpredictable situation in China. Its unbelievable to know that a country facing inflation can enter the trap of negative inflation in no time. The fluctuations have been at extremes. This can be attributed to the countrys internal political and economic factors and also the conflicts between various nations who have a direct impact of the basket of coomodities imported or exported in China.

Inflation, consumer prices

7 6 5 4 3 2 1 0 -1 -2 0.3 0.7 1.2 1.8 1.5 3.9 3.3 Inflation, consumer prices 4.8 5.9

-0.7 -0.8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BIBLIOGRAPHY
http://data.worldbank.org/country/china https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html http://topics.nytimes.com/top/news/international/countriesandterritories/china/index.html http://www.chinadaily.com.cn/ http://www.chinatoday.com/