China’s Economic Growth and Development

Introduction

According to Noble price winner economist, Kenneth Arrow, the People’s Republic of China (stated as China from now on) was among the first to have been nominated as the best-managed economies today (Lee). In recent years, the growth pattern of China has been extensive. The Chinese economy has outgrown its closed economic cocoon and evolved as one of the most open to trade countries in the world. It has emerged in the capacity of the world’s third-largest trading nation. In 2006, the country had an FDI to GDP growth of 33 percent, which was three times higher than that of the USA and 13 times higher than Japan (Zedillo). The country has a huge reserve of foreign exchange, which has made China a major international investor (Rossi and Burghart). The economy has grown at a rate of 9 percent in 2009 when most the developing countries are undergoing an economic recession (Economist).

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Globalization has undoubtedly helped china to become more powerful as economies, however; there are many economic paradoxes in the country that cannot be overlooked. China is the world’s most populous with a population of 1.3 billion people in 2009 (CIA). Due to the contraception policies that the government follows, the population growth is down to 0.65 percent in 2009. Other than this, there are extensive issues related to poverty, inequality, and other socio-economic factors. Presently there are certain problems that the Chinese government is facing. To name a few of them are real estate prices, excessive liquidity in the market, and inequality of income, poverty, and extremist problems on the western borders of the country.

This paper is a case study of the socio-economic factors of China. The paper will demonstrate the factors, which have made the country, ride a growth rollercoaster and the factors, which are still becoming impediments to that growth. The paper will first present a brief historical background of china and then describe the economic condition of the country. Then it will discuss the various indicators that are indicative of the growth status of the country. The paper will then discuss the problems that the country faces currently before concluding.

Economic Growth in China

China’s economic growth process can be divided into two distinct periods – the pre-reform era (before 1978) and the post-reform era (after 1979). The Chinese economy before 1978 was considered to be “on the brink of disaster” due to imbalances and issues related to low productivity growth and bad incentives (Zhang). The main imbalances observable in the Chinese economy then were capital construction and neglect of small industries and agriculture. Further, there was gross neglect of people’s livelihood, on distribution even when there was stress on distribution and efficiency of consumption. These imbalances led to high urban unemployment, rural poverty, and a sluggish growth rate of productivity.

In 1978, the government of China came out in one pursuit of a major economic reform after leaving state control of all major productive assets. In order to bring forth an economic giant, china encouraged the formation of rural enterprises and privately run businesses. It subsequently liberalized foreign trade and investment in the country, relaxed state control on certain products and their prices, and invested heavily in industrial infrastructure development, advancement, and education of its workforce. This comprehensive plan for growth worked miraculously for China (Hu and Khan).

Zang presented a comparison of the gross national product (GNP) growth rate and that of the population in the 1980s and 1990s and those of earlier periods. He found that there was a substantially high growth rate after the reform period. Before 1978, China had an annual growth rate of just 6 percent (which was inconsistent) (Zhang). After 1978, China posted an average real growth of more than 9 percent a year, which was more or less consistent with a high growth rate being 13 percent. The per capita income has almost quadrupled in the last few decades, and it is forecasted that the Chinese economy will be double the size of the US in the next 20 years (Hu and Khan).

In an IMF report, the reasons for China’s growth have been evaluated. The report suggests that some important and usual factors such as capital accumulation – the growth in the country’s capital stock like new plants, manufacturing units, and machinery, communication systems, etc. – played an important role. However, the driving force of the development was the Chinese workers or the plethora of human resources it had due to a very large population. Thus, the main driving force behind the Chinese growth was an increase in workforce efficiency. During 1979-94 “productivity gains accounted for more than 42 percent of China’s growth and before the 1990s”, it has overhauled capital as the most important source of growth (Hu and Khan 2). Therefore, this takes a departure from the traditional view of development wherein it is believed that capital investment becomes the driver of economic growth.

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The other factor that has been said to be the influencer of Chinese growth is foreign trade and investment. Zang studied the growth index of the gross value of imports and exports compared to the 1979 level (1979=100) and the degree of openness of the economy. He found that the degree of openness of the economy (calculated as the ratio of trade to GDP) in china has been strikingly rising from 11 percent in 1978 to 18 percent in 1985 to 25 percent in 1990 to 40 percent in 1995 (Zhang). Further, China also has a huge foreign reserve, which was $90 billion in 2002. China has also implemented extensive exchange rate system reforms in 1994. Further, China has been an attractive destination for foreign direct investment (FDI) ranking second after the US.

Now the question that arises is if the economic growth faced by China has been transformed into development for the country. What is the present situation in China? How the development of China can be traced? The next section will analyze the data derived from the National Bureau of Statistics of China (China Statistical Yearbook 2008).

Development of China

There is no doubt that China has experienced extensive growth in terms of economic growth however if it has experienced development is a question that still persists. This section will study is China’s growth has been carried out through a round developmental project.

Growth

First, an analysis of the economic growth of the country will be carried on. Considering macroeconomic data, (see table 1 in Appendix) we see that the GDP of the country has grown tremendously since 1978. The growth of GDP in 2007 vis-a-vis 1978 was 1500 percent and that to 2006 was 112 percent (China Statistical Yearbook 2008). The average annual growth rate of GDP since 1978 to 2007 has been 9.8 percent. Thus, there has been a tremendous growth since 1978 in China.

In terms of sector wise growth, we see that the share of secondary sector in GDP was highest followed by primary sector and then by services sector. As is shown in figure 2, there has been an increasing trend of contribution of tertiary or services sector to the country’s GDP. There has been a decline in contribution from primary sector to GDP and a consistently high contribution from secondary sector. This indicates that, according to the three-sector model presented by Colin Clark and Jean Fourastié, China is in the third stage where it has reduced its resilience on primary sector production and has moved towards a more industrialised economy.

Sector Wise contribution to Gdp
Figure 2: Sector Wise contribution to Gdp

Government expenditure has been increasing (see table 2 in Appendix). Government expenditure has increased by 123 percent from 2006 to 2007. Since 1979, there has been an increase in government expenditure by 4439 percent. Government revenue as a percentage of GDP has declined from 31 percent in 1978 to 20.6 percent in 2007. Proportion of government expenditure to GDP has also declined from 30.8 percent to 20 percent. This indicates that the economy’s resilience to government financing has reduced and the economy has opened up for private investment. This is a departure from the earlier totalitarian control of the government of the economy.

Trade

The opening up of the Chinese economy has been demonstrated through a development of trade. Net import export as a percentage of GDP has increased 9.7 percent in 1978 to 29.8 percent in 1990 to 39.6 percent in 2000 and 66.8 percent in 2007 (See table 3 in Appendix).

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Human Capital

Further, it can be observed that the Chinese government has financed extensively on development of the human capital of the country. That is why the level of education obtained by the Chinese has increased considerably. The rate of graduates has increased from 27 percent in 1990 to 71 percent in 2007. This is a huge leap in terms of imparting education. Further, there has been an increased expenditure allotment to research and development in the country. R&D expenditure of the country increased from 0.9 percent in 2000 to 1.49 percent in 2007.

Per Capita Income

However, in terms of development of the lives of the people, China is yet to reach the status of the developed countries. China has a per capita income of $ 5,420 as compared to East Asian average of $ 4,969 (World Bank). However the per capita of China is lesser than the European average of $11,262 or Latin American average per capita income of $ 9,678 or Middle East Asian average of $ 7,402. This indicates that in terms of per capita income, China falls behind many other developing countries in Latin America and Middle Eastern countries.

According to the key indicators published by World Bank in 2009, the industrial production index of the country has undergone a decline since 2007 when it fell from 18 percent in 2006 to 8 percent in 2007 (World Bank). The real GDP growth too fell in 2007 as there was fear of impending recession. Inflation in the country had fallen to 2.8 percent in 2006 however it started increasing in 2007 when it was 10.8 percent to 13.5 percent in 2007. This is indicative of a growing economy however the growth has become a bit sluggish due to the recession.

Poverty

Poverty alleviation is one of the main problems that China has faced since pre-reform period. In 1996 19.9 percent of the population of China was below poverty line (World Bank). Further the country has a wide inequality in income with the lowest 10 percent of the population 1.8 percent of national income while the highest 20 percent have a share of 50 percent of total income and highest 10 percent has 33.1 percent of the income (World Bank). Therefore the richer population of the country has a share of 83 percent of the total income, while rest 17 percent of income goes to 70 percent of the poor people. Further the Gini Coefficient of the country is 44.7 in 2000 (Earth Trends; World Bank). This indicates that the country has not sufficiently developed in terms of developing the social life of the people. The government has implemented a few reform projects to alleviate poverty in china like the Development Oriented Poverty Alleviation Program in Rural China (2001-10) (National Bureau of Statistics). A more in depth analysis into the poverty condition in China show that there 17 percent of the population of China is living on less than $1 a day (Earth Trends). Therefore the condition of poverty in China is very high which is becoming the main roadblock to the path of development.

Foreign Direct Investment

Foreign Direct Investment (FDI) in China has been very high. Figure 3 shows that there has been an increase in the increase in FDI in China. The growth has increased from 64 percent in 2004 to 210 percent in 2005. Thereafter the increase in FDI was intact however there was a fall in the rate of growth of FDI which fell to 27 percent in 2006 and then rose to 83 percent in 2007. The reason behind such high growth rate of FDI in Chain is due to a unique FDI policy adopted by the country (Lau and Bruton). The Chinese model of economic development was heavily reliant on FDI. China welcomed FDI from foreign investors to manufacture goods to be exported as well as to be sold in the growing Chinese market. Therefore there is a correlation between the country’s high level of exports and high level of FDI. Currently almost 70 percent of the produce for export is by foreign investors and around $700 billion Chinese exports was from foreign invested companies (Lau and Bruton; FDI.net). In some industries like those related to technology foreign invested company’s share to export exceed 85 percent (Lau and Bruton). Therefore FDI plays a crucial role in development of China.

Percentage change in fdi
Figure 3: Percentage change in fdi

Conclusion

The question remains – has China developed or grown? Growth of Chinese economy is undeniable. Since 1978, the country has taken giant leaps forward towards becoming self-reliant. The country is very low on Gini coefficient and the nature of poverty in the country of still acute. Inequality of income is a major problem wherein the real benefits of the growth are being accumulated in the hands of 30 percent of the rich population, while the rest 70 percent of the population remains poor. In comparison to the western world, the country has a very low per capita income. Therefore, China – the fastest growing country of the world – needs to carefully solve its internal problem of poverty and inequality.

Bibliography

“China Statistical Yearbook 2008.” 2009. National Bureau of Statistics of China. Web.

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CIA. The World Factbook – China. 2009. Web.

Earth Trends. “China.” 2007. Earth Trend. Web.

Economist. “Bull in a china shop.” Economist 392(8652) 2009: 75-78.

Economist Intelligence Unit. China. Country Profile. London: Economist Intelligence Unit, 2009. Web.

Hu, Zuliu and Mohsin S. Khan. Why Is China Growing So Fast? Economic Issues. Washington, DC: International Monetary Fund, 1997.

Lau, Chung Ming and Garry D. Bruton. “FDI in China: What We Know and What We Need to Study Next.” Academy of Management Perspectives (2008): 30-44.

Lee, John. “Is China Really An ‘East Asian Success Story’?” Policy 25(2) (2009): 9-13.

National Bureau of Statistics. “Poverty Statistics in China.” 2004. National Bureau of Statistics China. Web.

Rossi, Vanessa and Nora Burghart. “China Invests Abroad.” China Business Review 2009: 16-17.

World Bank. “Distribution of income or consumption.” 2005. World Development Indicators. Web.

“East Asia & Pacific: regional data from the WDI database.” World Development Indicators. Web.

“Poverty.” 2005. World Development Indicators. Web.

Zedillo, Ernesto. “China: Rich Country, Poor Country.” Forbes 177(11) 2006: 35.

Zhang, Amei. “Economic Growth and Human Development in China.” 2002. UNDP occasional paper 28. 2009. Web.

Appendix

Table 1: Macro Economic Data, Statistical Yearbook 2008

Item Aggregate Data
1978 1990 2000 2006 2007
Gross Domestic Product 3645.2 18667.8 99214.6 210871.0 249529.9
Primary Industry 1027.5 5062.0 14944.7 24737.0 28095.0
Secondary Industry 1745.2 7717.4 45555.9 103162.0 121381.3
Tertiary Industry 872.5 5888.4 38714.0 82972.0 100053.5
Gross Domestic Product by Expenditure Approach 3605.6 19347.8 98749 221170.5 263242.5
Final Consumption Expenditure 2239.1 12090.5 61516 110413.2 128444.6
Household Consumption Expenditures 1759.1 9450.9 45854.6 80120.5 93317.2
Government Consumption Expenditure 480.0 2639.6 15661.4 30292.7 35127.4
Gross Capital Formation 1377.9 6747.0 34842.8 94103.2 111417.4
Gross Fixed Capital Formation 1073.9 4827.8 33844.4 90150.8 105221.3
Changes in Inventories 304.0 1919.2 998.4 4251.1 6196.1
Net Export of Goods and Services -11.4 510.3 2390.2 16654.1 23380.5

Table 2: Government Finance (100 million yuan)

Item Aggregate Data
1978 1990 2000 2006 2007
Government Revenue 1132 2937 13395 38760 51322
Central Government 176 992 6989 20457 27749
Local Governments 956 1945 6406 18304 23573
Government Expenditure 1122 3084 15887 40423 49781
Central Government 532 1004 5520 9991 11442
Local Governments 590 2079 10367 30431 38339

Table 3: Development Indicators

Item 1978 1990 2000 2007
Foreign Trade
Proportion of Total Value of Imports & Exports to % of GDP 9.7 29.8 39.6 66.8
Domestic Trade
Per Capita Retail Sales of Consumer Goods (yuan) 163.0 731.0 3097.0 6769.0
Education
Rate of Graduates of Senior Secondary Schools (%) 27.3 73.2 71.8
Rate of Graduates of Junior Secondary
Schools Entering Senior Secondary Schools (%) 40.9 40.6 51.2 79.3
Rate of Graduates of Primary Schools
Entering Junior Secondary Schools (%) 87.7 74.6 94.9 99.9
Rate of School-age Children Enrollment (%) 95.5 97.8 99.1 99.5
Science and Technology
R&D Expenditures as Percentage of GDP (%) 0.90 1.49

Table 4: China Key Indicators

China Key Indicators

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