Transition Economy in China - Case Study Example

Transition Economy Introduction As strings of time continue to unwind there is usually change in social and political systems. There is innovation and increased production of goods and services in any given country. Since no one country is self sufficient there is exchange of these goods and services which have a great impact on the growth of countries. Natural resources and the location of a country also influence its growth because more resources will mean that the country will have more to exchange with other countries thereby gaining the much needed foreign exchange. If a country has much natural resources it will attract foreigners to invest in their country will can greatly help in poverty reduction by creating employment. (Zhang and song 2000). Policies made by the country’s government are also key factors which can encourage or discourage foreign investors. Changes in major sectors of the economy have to be done to cater for both the local and foreign investors. Funds put into a country by foreign people by introducing industries and other services usually has a great impact on that country’s political economy and management, structural reforms, trade and trade policies and privatisation of the country’s key industries by being acquired by foreigners (inward foreign direct investment). A country can also invest in other nations in order to increase their earnings from abroad and at the same time creating employment and increasing their relationship with other nations (outward foreign direct investment). These effects can easily lead to a lot changes in the economy of the country from a relatively poor nation to a prosperous nation (Buckley 2002). These changes have been observed in countries like China which has greatly changed in the last few decades to be one of the largest economies in the world. Statement on transition Economy In most nations there are numerous changes experienced in the social and political systems as a result of investment by both the locals and foreigners. China is one of the nations where abundant changes have been seen since the late 1970s when it welcomed foreign investors. China has numerous natural resources and cheap labour and there fore was a dream come true for most investors especially from western nations where there are relatively less natural resources and labour is expensive. In the 21st century China became the largest recipient of direct investment funds in the world. Since then investors from all over the world flocked here and have since then invested immensely in this country leading to its fast growth. In fact in the last few years China has been the fastest growing nation in the world. The foreign money invested in this nation has greatly affected most policies made especially those that relate to economy De Buele 2001). China has also invested in other nations to earn more profits from abroad or other nations. By doing so there is increased bilateral trade between China and the individual nations. China was generally a communist nation and has undergone tremendous changes in to a socialist society which has greatly influenced its fast growth. The economic sector was in a very bad shape in the 20th century till when Mao Zedong’s regime. Though the transformation of the sector was a challenging task he was able to change the economic landscape of the nation. By understanding the shape of this key sector, Mao introduced policies which led to economic transition of the economy. Some of the policies were about decentralization by a well structured coordination between the rural and the urban labour. By this China would be self reliant according to Mao and they would not need anything from especially the western nations. In 1978 one of the policies that led to a rapid change in the Chinese economy and growth was passed. This policy allowed foreign investors to invest and operate from China by setting up their industries. The industries introduced in China by mostly the western nations have both positive and negative effects and impacts on the political economy and management. The government has continued to approve new foreign investments in the last few years. This has led to an increase of the foreign direct investments which amounted to about 60 billion dollars in the year 2004. Approval and construction of foreign industries in the have increased the capability of China to export more products to other nations. This has of course increased job opportunities thereby raising the standards of living of the Chinese people, advancement in technology and generated high tax revenues for the Chinese government (Naughton, 1996). However there has been a conflict of interest with the companies being set up in China because their profits are mostly channelled to their respective nations. Policies have been developed by the Chinese government which attract even more foreigners have been devised and reformed with the sole aim of increasing the foreign direct investment. The Chinese government has played a major role in managing their economy in the recent years despite the economic recession in the world. There are many manufacturing industries in China and with this sector being the worst hit by the current financial crisis in many countries leading to loss of jobs. Loss of jobs in the manufacturing industries in China however has not led loss of jobs in general. In fact people are still able to get jobs in other sectors because of the less regulations imposed. This is very encouraging because there have been no major changes in the job market despite the changing financial situations as a result of good management of resources by the government. Good economic management of the inward foreign direct investment since the economic liberation times of China has also facilitated the reduction of poverty levels from about 60% in that time to about only 10% in the 21st century. As the Chinese economy went on prospering there was change of ownership of most of the Chinese industries and companies. Most of the companies were purchased by foreigners and some of them changed from being state owned to private ownership especially by foreigners. Unlike in the past the registration of privately owned companies was not a problem anymore and both locals and foreigners would easily be able to register companies. This was a big step towards gaining technological and managerial skills that they did not have and also to streamline their business operations in order to earn more profits. International investors were initially not allowed to operate in the coastal areas which had the ancient large cities. They were first allowed to invest in the interior before they were allowed to invest in the coastal areas with large cities. This policy was adopted to reduce unbalanced development between the interior and the coastal regions. All the Investors usually prefer to invest in areas where there is good infrastructure and at first were discouraged to invest in the interior where the infrastructure was relatively under developed. However, they still invested in the interior because apart from this policy, China had all it takes for an investor to invest in this country. Chinese government wanted to ensure that the foreign direct investment was flow to the interior regions to develop them economically. The vast natural resources and cheap labour are some of the key factors which encouraged investors to invest in this country. Setting up and buying privately owned companies in the Chinese interior led to increase in employment of the native of those regions which greatly reduced the rates of poverty in China. More than 500 million jobs were created as a result of privatisation of companies in the interior regions of China. Privatization in China varied from those of most nations in a number of ways. Restructuring or streamlining of the companies and industries was done before there was change of the management. Instead of being assigned free shares of public companies, interested investors were supposed to acquire an initial amount of equity shares. By this the public company would be able to raise funds to be able to reform before transfer of ownership. On the other hand public firms’ shares were sold to the general public and even international investors were welcome to own some shares. At times investors were given the first priority to buy these shares thereby introducing new skills and technologies into this country. Privatization of firms in China has not been a fully smooth process as there are some limitations to the process. The reforming of companies before they are sold off or change of ownership is sometimes not successful. This is common in instances whereby a firm is to undergo privatization to enable it to pay debts. Also there has been imminence corruption in most privatization procedures which is of course a limiting factor to most investors. International investors are now restricted from investing in some companies especially in the large and influential firms. There are some instances in which the government forces small companies to undergo privatization by the policies that have been adopted. This has also contributed greatly to increase in corruption in China. Chinese government adopted some changes whose main objective was to enhance economic growth or to strengthen their economy. The first that was done was termination of the communist system (communes) in all regions. Communism led to laziness of majority of people and this made the country to lag behind in development. Termination of the communes especially in the interior made many people from these regions to move to the major urban centers especially those in the coastal regions. A massive movement of people from the rural areas was not encouraging at all and therefore the government introduced new reforms to curb this. This was done by restructuring the industries in the rural areas and introduction of new industries. The government also played a major role in ensuring that the labourers were paid accordingly so that they could not think of shifting to the urban centers. Education sector, social security and medical care services were streamlined in the rural areas for as mentioned afore to encourage people to stay in rural areas rather than move to the urban centers. The government responded to this by restricting mass movement of people towards the urban centers. To effectively curb this, the government introduced measures by encouraging the foreign investors to invest in the rural areas. By introduction of investments in the rural areas most of the people in this large labour market were able to find employment and there was no need for them to shift to the urban centers. There was introduction of services like financial funding and advice to the rural people and they were therefore able to carry out their activities without need to move to the urban centers for the services. The enormous natural resources and better policies encouraged foreign investors to invest in China thereby China gaining a lot of inward foreign direct investment. Many companies including some of the world’s influential companies have continued to invest in this country. Foreign investors at one time were so many and there were also many pending approvals and the Chinese government had to regulate this by adopting some more reforms. Tough measures were introduced to reduce over investment and resulted to increased economic growth. Shifting of dependence on industry to service oriented jobs has also led to remarkable stability of the Chinese economy especially in the times of financial hardships. Unlike many nations where there are huge job losses, china has relatively low job cuts and those laid off can easily find some jobs. This has also been facilitated by creation of labour markets all over the country in the services sector where jobs are easily created with less resources utilized. Reforms were also adopted in the banking and the taxation sector. The government had to ensure that all people in china paid taxes accordingly and the defaulters had to face the arm of the law. Tax collected from both the locals and the foreign investors has been widely utilized in all regions by developing good infrastructure to enhance better movement of goods and communication. Better infrastructure had to be put in place especially in the rural areas to encourage investors and to stop the exodus of people to the cities. The banking sector was also improved to be able to cater for the large amount of deposits from the foreigners interested in investing in China. Banking sector was reformed to ensure that there was a fundamental planning in giving out loans, organized system and good financial flow within the banking system and to reduce competition in the banking sector. Three policy banks each with a specialized field were introduced through the central bank in order to cater for credit services and included; Import-Export Bank of China, the State Development Bank of China and Agricultural Development Bank of China. The government had control of operations of these banks and funded them through the national budgets. Restrictions in the banking sector were introduced by the government such that those banks that were not sate owned were put in the category of Non- Bank Financial Institutions (NBFIs). This measure was taken to reduce competition in the banking sector and to also prevent exploitation by these banks which were out to make profits. However, the NBFIs grew at a very fast rate because they offered loans to individuals unlike the policy banks which lend loans to large institutions. Structural reforms were also done in the trade sector to increase the number of exports from China. By these reforms in trade poverty levels have continued to reduce as reforms continue to liberalize in China over the period of reforms. Trade reforms have led to good distribution of resources within China thereby developing markets for the goods produced. Most of the Chinese people have continued to invest in their country and also in other countries. They are so investment oriented that they rarely save whatever they earn but put it back to the businesses. This has led to enormous imbalances as there are a lot surpluses and unbalanced wages being earned. Reforms in the foreign trade in China attracted foreign investors since the time of open door policy. This increased the total exports and imports in China making to be more reliable on foreign trade. China retains some of the money earned through foreign trade especially from the exports to help acquire imports when required to do so. Reforms in China have led to strengthening of the nation economically and also weakening and delaying of liberalization of some sectors like political system and civil societies. No one country including China is self sufficient and time to time has to depend on other countries to obtain goods, services and technological know how. Since the ancient times there was exchange of goods and services between societies and countries leading to emergence of trade. High-quality trade is dependent on many factors including natural resources and political stability of a country. Integration of the above factors can attract more and more traders leading to emergence of strong economic powers for instance China. In the last two decades China has grown immensely with increased exports and less imports because of the vast natural resources. China’s decision to join some of the major trading blocs in the world has facilitated fast growth of trade in China. These blocs for instance World Trade Organization (WTO)remove or reduce trade barriers, reduced transportation and storage costs in the member states thereby increasing their profits. China has also been a key player in other trading blocs and organizations like General Agreements on Tariffs and Trade (GATT) and Asian Pacific Economic Cooperation (APEC). These two organizations tend to set standard prices and tariffs of goods within this region. There is conflict of interest concerning the Chinese goods as most members of the WTO insist that Chinese goods are sold at very low prices. Financing support of traders by the government through development banks and financial institutions has also facilitated fast growth in this important sector. Foreign direct investment also has a great influence on Chinese trade. Domestic industries have grown more using the FDI with better productivity and thus increased exports. In all regions within China both the foreign funded enterprises (FFE) and state owned enterprises (SOE) showed increased productivity and thus more exports. Through establishment of manufacturing industries and other companies then the production capability of goods and services has been increased to a higher level. Though owned by foreigners these industries have directly increased trade between China and many countries strengthening their bilateral relationship. The impact of the foreign industries was increased exports and leading to increased earnings and employment of the Chinese people especially in the rural areas where there was more labour market but less job opportunities. China has also cut taxes on major exports in order to try and curb the large imbalance between China and other nations. There was need and there is still need to come up with trade related policies in order to sustain trade in China. There are several factors which led to make these policies; opening up of China through the open door policy was vital linking it to the fast growth. Better planning and competition reduction of state owned enterprises needed to be strategized effectively so as to increase trade particularly exports. The need to develop the rural areas into industrialized and developed societies was also considered in developing the trade related policies. This would reduce the massive movement of people from the rural areas to urban centers and at the same time increasing their earnings thereby reducing the poverty levels in the rural areas. The Chinese government also controlled production, markets and pricing of some agricultural products. This was to regulate production or to prevent overproduction of these products to prevent uncertainties in the market. It is no doubt that policy markers in this nation have been doing remarkable work to make decisions on behalf of the country especially in the trade sector. Many policies have been devised in China in order to sustain trade with the key partners. Policies in major sectors which are directly related to the Chinese economy were developed especially in the financial sectors and trade. Most or the policies made directly influence both exports and imports as China has continued to liberalize in the trading sector. The agricultural sector is one of the key industries involved with much trade as most of the raw materials for the manufacturing industry are obtained from this sector. The government has increased its financial funding through development banks and advice to farmers in this sector. The taxes and tariffs that were relatively high have been greatly reduced to make sure that this sector continues to prosper and to obtain much more earnings from it. More policies for the development of the rural areas have been developed and will be adopted to increase the wages of the rural people. This has to be done to reduce the gap of wage guidelines between the rural and the urban people. The government was shifting from the labour intensive industries to services because service industry was relatively easy to establish than the more labour intensive industries. Service industry would be more efficient in the rural areas by providing jobs for the many unemployed people in the rural areas. Trade policies introduced included provision of services like finance in the rural areas. These policies at one time restricted foreign investors from investing in the cities that were already developed. They were directed to the relatively under developed rural areas where the government introduce incentives to encourage investors to these regions by developing good infrastructure. Conclusion China has been among the fastest growing economies of the world from the late 1970s. There has been imminence contribution by the government since it introduced the open door policy which was initiated to attract foreign investors. The infinite natural resources and its relatively political stability was a major boost to lure the foreign investors. Foreign investors invested in China but their development was regulated by the government to ensure equality in development. Inward foreign direct investment in China has contributed greatly to the fast growth and strengthening of the Chinese economy. Development and adopting policies which were favourable to the foreigners also encouraged most investors and led to increase of the projects in China owned by foreigners. It was even more encouraging that the government supported all people despite of their regions, in both the rural regions and urban centers. The inward FDI in China has influenced the various sectors related and not related to economic issues. These sectors include political economy and management, structural reforms, trade and trade policies and privatisation of some of key industries and companies in China. Trading blocs in the Chinese region and those that have member states from all over the world have also played a pivotal role in the fast growth of the Chinese economy. It has not been easy for the Chinese people to achieve this and there are still challenges ahead. With the same motivation and good leadership the Chinese economy will still be the world’s fastest growing and an upcoming super power. References Alon, I & John, M 2008, Globalization of Chinese Enterprises. 2nd Edition. Palgrave Macmillan. Charles, P 2002, China in the World Economy: the domestic policy challenges. 2nd Edition. OECD Publishing. David, L. 2001, The making of Chinese foreign and security policy in the era of reform, 1978-2000. 2nd Edition. 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