assignement china
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Global Economics & Political economy
ASSIGNMENT # 01
The development strategy of China post Deng
Xiaoping’s assumption to power
Submitted to
Saleem Raza Sahib
Faculty, Department of Management, IBA, Karachi
Prepared by
Mir za Arshad Baig
EMBA PS-IX
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“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 Guang’an, Sichuan province, China. He was
a great Chinese communist leader, who was the most powerful figure in the People’s 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 hecalled 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.
Deng’s policies have been called “radical pragmatism.” Deng himself called it “crossing the
r iver by feeli ng 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,
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breaking down the collective farms and getting rid of state-run enterprises. One of the most
successful reforms —the "within" and "without” production plans— allowed 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 beneficialeffects 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
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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 1990’s . 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. China’s
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 Xiaoping’s 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
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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 (SEZ’S) “THE ENGINE TO CHINA’S
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 werelured 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 China’s 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 modernmanagement 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 China’s high -tech gross industrial output and
one-third of China’s high-tech exports. In addition, the ETDZs are also responsible for another
one-third of China’s high-tech industrial output and exports.
5) THE BANKING AND FINANCIAL SECTOR
Before economic reform, the People’s 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 People’s Bank was nominally transformed into a central bank. Specialized
banks, including the Industrial and Commercial Bank of China, Agricultural Bank of China and
the People’s Construction
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Bank of China, were established and given some autonomy in the extension of credits in the
early 1980’s 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 Xiaoping’s “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 ashigh 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 EconomicCrisis 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.
China’s growth rate has been five and six times higher than the growth r ate 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 plans — allowed 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.
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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 CCP’s 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 world’s 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.