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China and the Economy
Chinese Enterprise therefore is needed to better facilitate growth in China. In regards to China, private enterprise growth has lagged substantially behind that of State owned enterprises (SOE). Private enterprise, particularly in emerging markets will be a catalyst for future economic growth and development within the region. Free trade allows for the transfer of goods and services when demanded by specific economies. It also allows the countries best suited for such activities to flourish. Private Enterprise is important within the Chinese region as it continues to provide services to developed nations. The citizens of developed countries benefit as they have access to cheaper products and services. With the advent of globalization, Chinese manufactures are better equipped to expand overseas to expand their manufacturing competitive advantage.
The question regarding private enterprise is important as China is quickly becoming a dominant economic power. As such, private enterprise will have a very important role in the overall development of society. China therefore must realize many of the impedenments currently in place that hinders the growth of private enterprise. Society benefits from Chinese private enterprise as more dollars can be allocated to discretionary funds further boosting economic activity and subsequent prosperity. These savings can be directly attributed to free trade among nations with strong competitive advantages relative to their peer nations in regards to policy, manufacturing, and overall wealth. However, this competitive advantage relative to other countries is created by the SOE's rather than private enterprise. As such, to maintain this growth China's SOE must continue to command larger resources. This strategy is not as efficient as private enterprise would be. In addition American companies now market in China to promote their products. This has been quite successful as Chinese consumers see American made products as high quality. However, do primarily to government intervention; certain products remain in very low quantities so that SOE's can dominate the overall market. It is through the unique economic culture of China combined with many roadblocks such as corruption, and infrastructure that derail private enterprise development.
Consumers in China, due primarily to trade and the large demand for manufactured products worldwide, have experienced a massive increase in disposable income. According to recent statistics, annual earnings for the middle household in China have now raised to roughly $8,800 nearly double the amount of the 1980's. This bodes well for private enterprise growth as consumers are now better able to sustain a consumption-based economy. Private enterprise can also take advantage of the massive increases in consumer discretionary income to further their profit motives. Furthermore, with this increase in discretionary funds, Chinese citizens are now demanding more luxury items including fashion clothes, cars, and other discretionary items. In comparison with other countries however, the living wages and standards lag substantially. Living conditions, particular those of rural china still remain antiquated in regards to goods and services. Even with these prevailing statistics private enterprise continues to lag. This is due primarily to government intervention. SOEs continue their monopoly on systemically important industries such as energy and banking. Strict mandates from the Chinese government also stifle innovation and capitalism to a certain extent within the region. This form of "controlled capitalism" or "Danwei" is not without its merit however. For instance, the poverty rate with China has dropped 12% over the last 5 years. As mentioned briefly above, median household income, along with discretionary income has nearly doubled over the past few decades. However, massive control of specific enterprise does not bode well for future economic growth. Private enterprise allows for individuals to take risk while being compensated accordingly. Without risk taking on the part of private enterprise, businesses will not innovate. Without innovations, the profit motives for private enterprise disappear. This is due to the fact that entrepreneurs are not being adequately compensated for the risk they bear. Instead, SOEs dominate their respective markets which, in turn, stifle innovation and creativity. "Danwei" is particularly troublesome as it organizes specific aspects that should be given to the private sector. Aspects such as production, capital investments, licensing, and in some instances, living arrangements are conducted by SOE's. These handicaps prevent private enterprises from creating innovative solutions to problems. Instead, the SOEs create a culture of dependency in regards to private enterprise development.
Demand for Chinese manufactured goods provides ample opportunity for the region to grow (China NBS, 2012). Although the recent economic recession has mitigated the large growth of China, subsequent demand has created an increased standard of living for all stakeholders within the region. As consumer's lifestyles begin to become more consumer oriented, a subsequent demand for commodities and private enterprise will likely follow. With their excess cash, consumes need more fuel to power their cars, garments to stay fashionable, or natural gas to heat their homes. By controlling these respective industries the SOEs are essentially limiting the growth potential of the country. Consumers who otherwise would purchase specific products would instead elect not to. This absence of choice stifles innovation which ultimately lowers private enterprise growth. This has given rise for many of the worlds commodities that are now becoming scarcer. Due to the lack of supply coupled with increased demand, consumers in China will eventually pay higher prices for many of the more common commodities (China Statistical Yearbook, 2010). To simply support the large amounts of individuals present within the economy, China must acquire massive amounts of resources. As such, this activity drives up the prices of many of the world's commodities. Private enterprise however, could innovate to find new solutions to Chinas growing energy problem. Instead, "Danwei" has established a "one best way" approach to capital allocation and investment. With over one billion people in China, one person may be able to derive an innovation to support Chinas energy concerns, if given the opportunity. However, if such a method was discovered, private enterprise would not allow the individual to fully capitalize on his innovation for the benefit of society. Instead, SOEs would either take the idea as their own, or not allow it to manifest itself altogether. This supreme power approach to capitalism lends itself well to corruption. China specifically, has been notorious for infringing on American companies intellectual capital. This ultimately hinders international trade which discourages innovation among Chinese businesses. Furthermore, international trade is hindered as businesses may be reluctant to engage in joint ventures with Chinese businesses in areas with high degrees of copyright and intellectual rights infringement. Due to the immense power of SOEs, they can command attention and respect. In some instances this power can be abused to the detriment of the entire country. Through corruption, friends of powerful officials may be awarded a contract undeservedly. The country suffers as the inefficient operator is given the contract while the more efficient operations are forced to close. This creates problems for private enterprise investment as individuals are less likely to create processes that are efficient and helpful to society. Instead they are discouraged by SOEs from doing so.
Technology also hinders growth for private enterprise. Technological infrastructure significantly lags behind that of its developed counterparts. This again is due to the restrictive polices of government. By allowing companies and individuals the opportunity to innovate, China can develop infrastructure solutions that rival those of their developed counterparts. However the restrictive nature of government doesn't compensate individual innovation. Instead, the government, paying high tariffs imports the technological advances of other countries. In many instances, the Chinese simple copy the innovations of others without permission (more on this topic in the intellectual property section). This behavior should be given to private enterprise with the appropriate incentives attached. This action will ultimately help grow private development, rather than hindering it.
China currently wants to refocus its efforts on consumption in regards to its citizenry. Before, China focuses primarily on export related services. China now wants to focus on rebalancing growth towards consumers. I agree with this approach for two primary reasons. One, as evidenced by the recent economic downturn, economies, irrespective of their involvement with activities, is more engaged with other countries. Globalization has ensured that occurrences in one country will in turn affect other unsuspecting countries. China is no different in that regard as it is directly correlated to the performance of America and the developed nations. Both the U.S. And China need each other. It is a symbiotic relationship with both parties benefiting. If the United States halted imports from China, the cost of the many of the American produced products would increase substantially (DeGlopper, 1987). Items that were once considered "cheap" will automatically become expensive as inefficient American manufacturing costs are passed to the consumer. As mentioned in detail above, the Chinese have a competitive advantage relative to other nations in regards to manufacturing. By importing from China however, more American citizens have more discretionary income to spend on more products and services. As such China must therefore protect itself in the event that relations sour with other countries or economic circumstances within the…[continue]
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