Major economic factors causing high-growth rates in Chinese economy from 1979 onwards

Updated: Apr 30, 2021

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Before 1978, China was a socialist country which was relatively poorer compared to Europe and North America . Chinese economy was designed mainly by the Communist Party which was led by Mao Zedong. Mao’s charismatic leadership and Communist parties’ high organizational skills to organize masses gave The Communist Party opportunities to try for a socialist, nearly close economy between 1949 to 1978. This economic trial resulted with relatively low growth rates compared to Europe and the United States, famines and socially catastrophic events. Examining the catastrophic results of the former policy and the increase of economic power of its neighboring states China decided to take a new path. During the Communist Party congress held in 1979 it was agreed to shift economic policy to a more market-oriented economy. This shift resulted in an economic growth at a very high and steady rate. From 1978 to 2008 global economic crisis, China’s economic output growth rate was 9.5 percent per year which was higher than World’s and the United States’ output growth average[1] . Also, China’s economy covered very rapidly from the economic crisis in 2008 and continued to be the biggest contributor to the world’s economic growth[2] . The major economic factors inducing China’s high economic growth beginning with the 1979 market-oriented reforms, which resulted in a shift from planned economy to a market economy and joining the global economy, have created opportunities for individual citizens in rural areas by introducing the availability of liberal market concept in mainland Chinese territory and encouraging international trade for both local and international companies through creating a better environment for foreign investments through embarking on globalization as the key of Chinese economic policy.





The major economic reforms that contributed to the economic transition to a liberal market in rural areas was through allowing individuals to trade their agricultural production via the household responsibility system and creation of the village-owned enterprise. Under the communist system, farmers didn’t have enough greed or courage to work effectively because they couldn’t control their surplus or sell it since it was taken and controlled by the government [3]. Thus the introduction of the liberal market concept shifted the economy from an isolated economy to a market economy started with the reformation process in agricultural areas and then spread to the village enterprise area [4]. With government support the household responsibility system was enforced, which allowed farmers to sell their surplus crops after giving the government a significant share in their crops in such a way like tax[5] . This type of non-socialist system resulted in a steady and high rated rise in agricultural production output, thus the growth rate of the gross value of agricultural output rose nearly 300% in the first six years of agricultural reform[6] . The liberal market system dynamics got even stronger t least at local industrial production with the opening of Township and Village Enterprise (TVE). TVEs started in 1978 with six pioneer enterprise in Sichuan provinces and evolved significantly to a number of 6,600 enterprises at the end of 1980. TVEs were responsible for 60% of output in all state enterprises. In 1984 TVEs got reformed in the light of liberal market dynamics like giving autonomy to TVEs and determining the price of the products being sold by TVEs rather than enforcing the central committee's decision. These previously mentioned developments created a way and base for upcoming foreign investments and local companies in a way that it showed positive effects of market dynamics in economic production[7].


The most important reforms made to be part of the global economy and being an attractive country for foreign trade was done in 1980’s by opening some coastal cities, provinces of Hainan shift and creating the ideal environment for foreign investors and benefitting in terms of knowledge and becoming a significant partner in the global trade . The coastal cities aimed to implement fully liberal market economy, which prioritized private ownership laws, tax breaks and wages according to the market dynamics[8] .These special zones also created opportunities for foreign investors to take advantage of well-educated and high-skilled workers that working in low wages[9]. Therefore these zones became one of the most important reforms of China’s globalization process. China’s aim to pull foreign investors by creating an ideal environment for them resulted in China becoming one of two highest receivers of foreign direct investment inflow every year since 1992[10]. Thus, between 1993 and 2000 China received a sum of 305$ billion dollar foreign direct investment (FDI) . In 1998 FDI was creating 44% of China’s entire exports and 15% of total industrial output[11] . Globalization and open market policies created the right environment for foreign investors which resulted with high levels of FDI inflows as results show. Another benefit of FDI besides the high level of capital inflow was adding different aspects to Chinese economy such as know-how knowledge in different topics like nuclear energy to LCD panel technology through technological transfer between the foreign investor and China which created a spillover effect on long term. Creating a link between skilled workers in China with the international production networks around the world, helped China to establish a brand name[12] . Main example of this knowledge and technology transfer through FDI are visible in mobile phones and cars produced in China . Using foreign investments for setting up factories or agreeing with subcontractors for production of mobile phones and cars in China had given opportunities to China for technological transfers from investor companies and know-how experience for firms in China. Therefore with the right government support like low taxes or low interest rate credit from state banks, investors set up high-level, global companies like Geely, Xiomi or Huawei in mainland China.


To sum up, lots of different factors aided in China’s successful shift from closed economy to open market economy, which began in 1978 with significant reforms such as agricultural reforms by implementing household responsibly system or the establishment of TVEs and opening the coastal cities for global trade to increase the foreign investment. These reforms created lots of benefits for individual citizens and created the right environment for local and global investors/companies which resulted with high FDI inflows. As a result governments’ policies through globalized China changed Chinese economy. In 1973 China was responsible for 1 percent of world exports and in 1983 [13] it rose to 1.3 percent[14] ,with the steady rise in 2019 China is now responsible for 13 percent for exports and 11 percent of imports while being the second biggest economy in the world today[15]. China is trying to shape and take control of the future of global trade under the leadership of Xiaoping with the belt and road initiative which started at 2013 and is planned to end in 2049 with a result of hundreds of new ports, railroads, roads, tunnels, bridges… If road and belt project goes accordingly with Xiaoping plans, in 2049 world trade routes and trade will be controlled by China, which will also give political leadership of the world politics to China because of the strong correlation between economic and political power throughout history.


[1] Chow, Gregory C. China's Economic Transformation. Third ed. 2015,3,.

[2] Chow, China's Economic Transformation., 3.

[3] Ibid., ,45.

[4] Garnaut, Ross. "40 Years of Chinese Economic Reform and Development and the Challenge of 50." In China’s 40 Years of Reform and Development: 1978–2018, edited by Garnaut Ross, Song Ligang, and Fang Cai,. Acton ACT, Australia: ANU Press, 2018, 29-52.

[5] Chow, Gregory C.. 2015. China's Economic Transformation. Hoboken: John Wiley & Sons, Incorporated.,45.

[6] Chow, Gregory C. "China’s Economic Transformation." In China’s 40 Years of Reform and Development: 1978–2018, edited by Garnaut Ross, Song Ligang, and Fang Cai, 93-116, ANU Press, 2018,95.

[7] Brødsgaard, Kjeld Erik, and Koen Rutten. "Market Allocation and Enterprise Reform in the Primary Stage of Capitalism (1978–1992)." In From Accelerated Accumulation to Socialist Market Economy in China: Economic Discourse and Development from 1953 to the Present,. LEIDEN; BOSTON: Brill, 2017. 53-93

[8] Brødsgaard and Rutten. "Market Allocation and Enterprise Reform in the Primary Stage of Capitalism (1978–1992).",53-93.

[9] Chow, China's Economic Transformation , 56-60.

[10] Zhang, Kevin Honglin. "How Does Foreign Direct Investment Affect Economic Growth in China?" Economics of Transition 9, no. 3 (2001): 679-681

[11] Ibid., 679-681.

[12] Ibid., 679-681..

[13] World Trade Organisation WTO. "World Trade Statistical Review." IDEAS Working Paper Series from RePEc, 2019, IDEAS Working Paper Series from RePEc, 2019,23.

[14] World Trade Organisation WTO. "World Trade Statistical Review 2017 .", 2019,26.

[15] Kaplinsky, Raphael. 2007. "THE IMPACT OF CHINA AND INDIA ON THE DEVELOPING WORLD." CESifo Forum 8 (1): 15-21.



Bibliography


Brødsgaard, Kjeld Erik, and Koen Rutten. From Accelerated Accumulation to Socialist Market Economy in China: Economic Discourse and Development from 1953 to the Present. LEIDEN; BOSTON: Brill, 2017. www.jstor.org/stable/10.1163/j.ctt1w8h2tj.


Chow, Gregory C.. China's Economic Transformation. Hoboken: John Wiley & Sons, Incorporated, 2015. Accessed December 1,2019. ProQuest Ebook Central.


Kaplinsky, Raphael. "THE IMPACT OF CHINA AND INDIA ON THE DEVELOPING WORLD." CESifo Forum 8, no. 1 (Spring, 2007): 15-21. https://search.proquest.com/docview/217447343?accountid=13638


Yao, Yang. "The Political Economy Causes of China’s Economic Success." In China’s 40 Years of Reform and Development: 1978–2018, edited by Garnaut Ross, Song Ligang, and Fang Cai, 75-92. Acton ACT, Australia: ANU Press, 2018. www.jstor.org/stable/j.ctv5cgbnk.13.


Garnaut, Ross, Ligang Song, and Cai Fang, eds. China’s 40 Years of Reform and Development: 1978–


2018. Acton ACT, Australia: ANU Press, 2018. www.jstor.org/stable/j.ctv5cgbnk


Kaplinsky, Raphael. 2007. "THE IMPACT OF CHINA AND INDIA ON THE DEVELOPING WORLD." CESifo Forum 8 (1): 15-21. https://search.proquest.com/docview/217447343?accountid=13638.


Zhang, Kevin Honglin. "How Does Foreign Direct Investment Affect Economic Growth in China?" Economics of Transition 9, no. 3 (2001): 679-93


World Trade Organisation WTO. "World Trade Statistical Review." IDEAS Working Paper Series from RePEc, 2019, IDEAS Working Paper Series from RePEc, 2019


World Trade Organisation WTO. "World Trade Statistical Review 2017 .", 2019.

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