The Forces Driving the Growth of Chinese Economy with Capitalism and Socialism (Fall 2012)

European countries such as Great Britain, Germany, and France colonized many Asian nations between 19th and 20th centuries. When a country has been colonized, it was difficult to regain their economy status. For example, many Southeast Asian countries such as Philippine, Vietnam, and Cambodia still have a very low economic rate of growth. However, China has had a specular economic success over dedicate years, although they have been colonized by Japan during the World War II. In the beginning of the 1800s, Napoleon expressed China: “China is a sickly, sleeping giant. But when she awakens the world will tremble.” After Mao’s death in 1976, China seemed to awaken from its long sleep at last and seemed to be ready to shake the world. Moreover, after reform in China in 1997, the Chinese economic globalization has been bigger and bigger. Additionally, the article “China’s Great Economic Transformation” by Loren Brandt and Thomas G. Rawski contains that for the last two decades, China’s average Gross Domestic Product (GDP) growth rate has been above 9.5 percent per year, and it is the 5th fastest growth rate on record in the world’s history (3). No nation’s economy has ever achieved a nine percent annual growth rate. The main key to the growth of Chinese economy is a combination of socialism and capitalism. It is generally recognized that capitalism interrelated with democracy not socialism because capitalism is based on the free-market system, which there was no required the government interference. However, China believes that capitalism compatible with socialism well. It could be true because there exists the government interference on economic policy in many democratic states. After all, the reform that kind of hybrid economic system led the success of increasing agricultural production, industrial production and vigorous foreign investments and those were the driving force of the growth of Chinese economy.

First of all, the hybrid economic system played a big role in the agricultural production. During Mao’s reign, he introduced the Great Leap Forward to increase food production and relocate farm workers to urban area. However, his plan ended in failure, and it was tremendously negative effect to the economic status in the rural area. Economists said that it was the fatal mistake and it set China back for decades. After Mao and Hua Guofeng, Deng Xiaoping was at the helm in the regime. He said, “Whether it be a yellow cat or a black cat, the cat that catches the mice is a good cat” (Shen 57). It represented well why he introduced the capitalism on the Chinese economy system under socialism. Previous Chinese government and many communists claimed that communism could not be mixed with capitalism properly. Therefore, his opinion was amazing and innovative at the time. Nevertheless, many Chinese supported him because they thought it seemed that the economic status couldn’t get any worse more. Deng mainly focused to revive the Chinese economy that felt down by the Great Leap Forward.

The first economic reform in the late 1970s restored house agriculture in rural areas (Wang 85). The most important aspect of the reform was allowing the personal gain and profit for farm workers. Under socialism system, farm workers couldn’t work for their own benefit, and it caused of their motivation decreased. In consequence, the lack of motivation became the reason of decreasing economy in the rural area. Unlikely, gaining the ownership and personal benefit were allowed for workers in the free-market system. Therefore, Deng decided to adopt the free-market system to rural area. At that time, people who lived in rural areas were 80 percent of the population in China. It was screamingly obvious that if the economy in the rural area improved, it started a ripple effect throughout the Chinese economy. Finally, Deng modified the market system newly that farm workers produced the amount that the government required and then they could work for themselves.

Under the new system, farm workers were able to save their property. However, they also could control the market price when they sold their products. It was difficult that the Chinese government restricted the situation because there were too huge rural areas to keep watch all farm workers. Early in the 1980s, due to the difficulty of the degree of government’s interfering, the restriction started to be getting weaker. Finally, the government allowed the price control. Therefore, peasants could get much higher benefits from selling their products in rural area (Shen 86). Fortunately, the allowing control of the price for the produces affected positively increasing China’s agricultural production. This increment of farm workers’ income also accelerated the growth of economy in nonagricultural rural China. Also, there were large-scale movement rose from agriculture to industrial in mid 1980s (Wang 32).

Increasing agricultural productivity also affected to increase export. During the reform period, peasants who earned a lot of money from higher price policy carried their eye from the home market to overseas market. The farm workers adopted a lower price policy for the overseas market because there were already so many compatible products in there. In a result, their product, which had lower prices then other products, survived through price competition in the foreign market. In other words, they dominated the market by the low price, and finally it was negative effect for the world market. However, it was true that affected to grow the Chinese economy.

In conclusion, the agricultural reform was successful to improve economic status in China. Especially, Deng’s open-minded policy such as allowing farm workers own profits, prices, and export had adopted well in the rural area. It also paved the way for the growth of Chinese economy not only for the rural area but also the urban area. Therefore, it can be said the agricultural reform was the turning point of Chinese economy.

Second, in the late of 1970s, the reform also was executed in industry as well as the reform in rural area. Originally, the government expected increasing productivity by the industrial reform. However, the actual successful industrialization occurred by that the modernization in the rural area encouraged successful urbanization in mid 1980s. Basically, the industrial reform started with several restrictions under the government’s control that required delegating power and giving up the interests from industrialists. However, the incentive mechanism, which came from rural area, started to change the power moving from the government to enterprisers. Finally, the government allowed the enterpriser retained a greater part of their profits for their one use. This was the beginning of the industrialization in China.

Moreover, success of the modified policy reform led to the rise in urbanization. Between 1978 and 2004, the urbanization rate had increased by 23 percent. In 2004, China’s total gross industrial output increased 38 times, at an average annual rate of 11.5 percent (Wang 100). Due to urbanization, the manufacturing industry grew rapidly. According to Wang Mengkui, “CHINA’S ECONOMY” the manufacturing industry reached 88 percent of the gross industrial output, 78 percent of the added industrial value, 75 percent of the industrial assets and 86 percent of the sales of industrial product in recent years (131). In addition, the rise of urbanization also caused of China became huge manufacturing area called the world-manufacturing center. After more than 20 years of fast development, many manufacturing factories from other countries established their own factories in China.

In short, the success of industrialization became the reason of the movement of many Chinese to the urban area and establishment of foreign companies. In result, many products produced from China even though it was not Chinese company. In other words, the economic globalization began in China.

Third, the reform based on the hybrid economic system elicited the successful foreign investment. Under the socialism, uses of foreign capital did not make any sense to socialist because Lenin and Stalin basically restricted the use of foreign capital. Therefore, during the period of Mao’s leadership, he tried to solve the economic problem within China, and he had negative perspective on foreign economic contacts (Tim 1). Actually, many Asian countries had been imperialized so, they might not want other countries’ companies established their land. In addition, according to “China Statistical Yearbook 2007” by the National Bureau of Statistics of China refers that before reform in the early 1980s, foreign investments were under some restrictions. For example, China only wanted foreign investors to join with Chinese firms. However, after finished Mao’s regime, China began to allow the establishment of foreign companies under the loose restriction. This reform encouraged the foreign companies extended their business to China, and it also helped to resolve the unemployment problem in China. Finally, the solution played important role in growing the GDP in China.

As time goes by, the Chinese government started to open its door to the world economy more actively. These open-door policy began with Deng justified that they needed to use the foreign capital unlikely Lenin and Stalin. Moreover, success of increasing productivity in rural and urban areas boosted product imports and exports. It made the Chinese authorities realized that the priority of need for their economy (Dutta 180). Additionally, they suggested benefits such as tax reduction, exemption, and refund to encourage the investment for foreign investors. It was very attractive proposal for foreign investor. As mentioned previously, China became the center of the world-manufacturing factory. The large scale manufacturing and growing exporting products captured the foreign investors. Hence, China had a huge foreign capital through the investment. Therefore, capital inflows increased around 58-60 percent of Chinese investment rate of 36.8 percent. Cumulative Foreign Direct Investment (FDI) amounted to US $519 billion for last twenty years and it also contributed quite a lot to the success of the Chinese economy. A large portion of this FDI had come from the Chinese residing in foreign countries (Guo 211-217).

As a result, the increasing foreign investment brought many positive outcomes such as reducing a necessity of foreign borrowing and imports, increasing domestic productivity, and employment opportunities. These outcomes fed through the domestic economy. The open-door policy caused not only for the increasing economic growth but also having the opportunity to learn the advanced foreign technology. Therefore, it also produced good result as Chinese modernization.

In conclusion, China has successfully adopted capitalism to socialism and the mixed system positively affected agricultural and industrial productivity. Consequently, the increasing productivity spurred the increasing foreign investment. Nowadays, people can see the mark of “Made in China” on every product easily, even though the product is not a Chinese brand because companies of various countries already have manufacturing factories in China. Also, nobody can deny that China’s economic development is incredible both in quantity and quality. The reason why many people pay attention to the Chinese economy is that China still has enormous potentials for economic development. In addition, many countries know that the Chinese economy has already affected to world’s economy. China’s change from a “sleeping giant” to a “flying dragon” is giving wonder and surprise to the world. Moreover, the most important thing is that the China has more than enough potential to be the next powerhouse, which will be the driving force or locomotive of the world economic growth. However, China still remains socialist state. We must know that their success of economic growth is based on their hybrid system that mixed capitalism and socialism. A few years ago, I have seen the news that the Google withdrew from China. I thought that the Google would have another strategy to get through into China. However, they still cannot establish their business in China because of the Chinese private policy. Although China opened the door to the world economy, the restrictions such as investors joining with Chinese company were still available until recently. Over the next years, it would be required to reduce its import tariffs to simplify the rules for foreign companies doing business in China, and to enforce laws that protect international intellectual property. These activities were necessary for foreign companies that want to set up factories or sell goods in China.

Sources

1. Dutta M. China’s Industrial Revolution and Economic Presence. Danvers: World Scientific Publishing, 2006. Print.
2. Loren Brandt and Thomas G. Rawski. China’s Great Economic Transformation. New York: Cambridge University Press, 2008. Print.
3. National Bureau of Statistics of China. China Statistical Yearbook 2007. China: China Statistical Press. 2007. Print.
4. Raphael Shen. CHINA’S ECONOMIC REFORM: An experiment in Pragmatic Socialism. Westport: Praeger Publishers, 2000. Print.
5. Rongxing Guo. How the Chinese Economy Works. New York: Palgrave, 2007. Print.
6. Tim Wright. The Chinese Economy in the Early Twentieth Century. New York: ST. Martin’s Press. 1992. Print.
7. Wang Mengkui. CHINA’S ECONOMY CHINA. China: China Intercontinental Press, 2006. Print.