China's Economic Reform Term Paper

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China's Economic Reform

An Examination of Economic Reforms in China since 1980

As the 21st century unfolds, China has emerged as a potential political and economic juggernaut that appears to be finding its stride in the international community and marketplace. As the second-largest economy in the world after the United States, the Chinese people have clearly embraced international commerce in a major way. To date, though, while there have been a number of political and economic studies conducted at the national level on China, specific regional studies are less common; however, the 1989 analysis of Guangzhou by Ezra F. Vogel helps to place this enormous region into perspective. In this regard, this paper will provide an overview of the economic reforms taken by the Chinese leadership in general since 1980, and those in Guangzhou in particular, to identify the impact of these reforms on the country's social and economic progress. An analysis of the implications of China's accession to the World Trade Organization will be followed by a summary of the research in the conclusion.

Review and Discussion

Background and Overview. By any measure, China has assumed a major leadership position in the world in terms of its political and economic might today; however, the road to this lofty position was rockier than expected, and it has taken them longer to get there than most observers imagined. Nevertheless, today, measured on a purchasing power parity basis, China boasts the second-largest economy in the world after the United States (China Economy 2). China also has more Internet users than any other country (except the U.S.), and many coastal regions near Hong Kong and opposite Taiwan and in Shanghai have enjoyed particularly strong growth in recent years. There remain some fundamental problems, though, with an antiquated political framework that is attempting to accommodate new market and social reforms while attempting to maintain control over a people who are increasingly enjoying the fruits of its free enterprise labors (China Economy 2). How long this unwieldy political arrangement can endure is anyone's guess, but all signs point to an erosion of the former totalitarian policies that constrained economic and social freedoms in the past (China Economy 3). The political and social conditions in modern China are the direct result of the reforms initiated by Deng Xiaoping who drastically altered the course of contemporary China's economic development. According to Shen (2000), "Deng engineered the thawing of a rigidly structured system frozen in time via effective reform measures. . . . Deng preserved the Party's authority, exercising ultimate power, yet initially permitting and later actively promoting the actualization of entrepreneurial potential through decentralization" (14). Deng's 1978 "Four-Modernization" program refers to his call for adjustment, restructuring, consolidation, and improvement in the structure, functioning, and performance of China's economy; this initiative provided a "coverall" directive that attempted to achieve structural and functional corrections in the economy, solidifying current and future successes, and attain new heights for future successes (Shen 15). Other impressive reforms during the late 1980s and throughout the 1990s related to improvements in the country's supply chain management techniques, attracting increasing foreign direct investment and developing strategic partnerships and joint ventures with major international players (Ho 86).

The impact of these reforms to date has been impressive, with the country's GDP quadrupling since 1978 as a result; the nation's current GDP estimates are provided in Table 1 below (China Economy, 2005).

Table 1. China GDP (2004 estimate).


Purchasing power parity - $7.262 trillion (2004 est.)

GDP - real growth rate:

9.1% (official data) (2004 est.)

GDP - per capita:

Purchasing power parity - $5,600 (2004 est.)

GDP - composition by sector:

Agriculture: 13.8%

Industry and construction: 52.9%

Services: 33.3% (2004 est.)

Investment (gross fixed):

46% of GDP (2004 est.)

Source: World Factbook, China Economy 5.

Impact of Reforms on Guangdong. According to Kwok (2001), "Since the start of the Economic Reform in 1978, the market economy and administrative decentralization have expanded, leading to greater regional differences and diversity. Localities have emerged as the locations of, and competitors for, growth" (353). During the last half of the 1990s, a few comparative regional studies emerged as an important and major field for investigating China, such as Ezra F. Vogel's One Step Ahead in China: Guangdong under Reform (1989). In this work, the author points out that the mutual dependence of localities and enterprises in China has a significant institutional basis that have served to shape the current framework of foreign investment and enterprise choices.

According to Hao (1994), local governments throughout China have both administrative and economic functions; at the same time, Chinese companies are also production units as well as administrative entities that are characterized by a sense of community. "This feature makes it very difficult for firms to be independent of local government," Hao reports, "since the latter not only controls their economic affairs, but also their political and social affairs" (171). In the allocation of foreign exchange, localities rely heavily on the foreign exchange earnings of enterprises, and therefore also have a powerful motivation to ensure that their enterprises are included in the distribution of resources. Clearly, in both cases, the more foreign exchange that is earned, the more advantageous it will be for the companies and regions involved. In fact, it was this mutual interest that encouraged both sides to reinforce their strategic partnership in the Guangdong region (Hao 171).

For example, Vogel (1989) notes that Guangdong province's joint industrial-commercial foreign trade enterprises was able to take advantage of a special arrangement in which 20% of the firm's foreign exchange earnings were sent to Beijing, and 30% to the provincial or metropolitan level; this arrangement meant that 50% of these earnings were returned to the company as its entitlement. In the case of Guangdong, the larger the basic amount of foreign exchange earned, the more both local governments and companies received (Vogel 390). In addition, the special relationship between Guangdong and Hong Kong remains a very favorable asset for the province; Hong Kong investors have transformed the province, particularly the Pearl River Delta, in large part as a result of their role in its infrastructural development, export processing, real estate, services, and other sectors (Hao 231).

The future nature of relations between the central Chinese government and the political and business leadership in Guangdong will relate to the interplay of domestic and external forces that are still emerging; however, there are a number of factors in this analysis that are highly favorable to Guangdong that will continue to influence how this relationship unfolds in the future. For example, Guangdong is expected to remain a major player in Chinese politics in the future because of its economic status. Because it was able to maintain a leading role in past reform efforts and the opening of markets to Chinese companies, Guangdong has been transformed from a relatively backward area into a leader in the Chinese economy today. According to Hao, "The province's GDP, national income, total retail sales, and exports all ranked number one in the nation in 1991; in fact, Guangdong's per capita GDP and national income ranked it fifth in the entire nation. Furthermore, Guangdong established itself early on as a powerhouse of external economic activities by acquiring 50% of China's foreign direct investment and accounting for more than 33% of the nation's total exports (Liu 29). Today, the province enjoys even stronger bargaining power with the Chinese central leadership and can be reasonably expected to oppose any policies that would have adverse effects on its local economy (Hao 237). Another factor that has played out in favor of regional development in Guangdong has been the concentration of a reformist leadership there that has strengthened the province's new assertiveness in pursuing its unique interests. Consequently, the majority of the leading provincial positions are filled by individuals who are either Guangdong natives or veterans built their lives there (Hao 237). In addition, in the closing years of the 20th century, Hao reports that while almost half of the Party Secretaries and Governors in China were natives of the provinces where they worked and 73% spent their entire career in the same province, in Guangdong, the Party Secretary (Lin Ruo) and all three Deputy Secretaries as well as the Governor (Ye Xuanping) and one third of the Vice Governors were natives and the situation has not changed much since 1988 (Hao 237). Finally, and perhaps just as importantly, there remains solid support for continuing reforms in this region and the implementation of special policies since 1978 has further motivated provincial officials to become increasingly vocal in defending the province's vested interests (Hao 238).

Constraints to Development.

Today, the Chinese government is confronted by three primary challenges: 1) to sustain adequate jobs growth for tens of millions of workers who were laid off from state-owned enterprises, migrants, and new entrants to the workforce; 2) eliminate corruption and other economic crimes; and (3) provide support for a wide range of faltering but still-important and large state-owned enterprises,…

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