China's_Economy

1. How was China’s approach to economic transitions different from that of most of the other socialist countries' The main difference between China and other socialist countries is the degree of change. China, compared to other countries chose a gradual transition rather than the radical transition chosen by other socialist countries. Basically, the Eastern Europe nation reformers wanted to change their economies into the modern economy as quickly as possible. This was because of the distrust of the previous system of communism. Thus this political, social and cultural change allowed these nations to build a new system completely from scratch. This radical change is also called the ‘big bang’ referring to the completely new start. The Idea behind this approach is that the economy would undergo losses in the beginning of the transition and will make up for it later in the long term economy. However it turned out that the costs were more than expected. On the other hand, the Chinese were slower and more cautious towards their transition approaches. The reformers of China saw that their situation was rather different from that of other nations. So they chose a gradual approach opening their economy slowly to other nations and alleviating the pressure on individuals and private corporations. Basically the Chinese economy transferred their system, first focusing on what problems they needed to solve from the original socialist system and then changing the original system into more effective ways of the marketing system. This process allowed the Chinese to transform into a stable economy without the provoking social and economic unrest. 2. The author mentioned the character of Chinas gradualist transition (First phase reform) mainly in Chapter 4. How many key features did he mentioned on China’s transition' And what are they' The first reform was throughout the 1980s and the second through the 1990s. The first phase can be simply described as a cautious and careful reforms focusing mainly on the agricultural and industry sectors using something called the dual track strategy, also alleviating the pressure on individuals and organizations from the government. The first and main aspect of the first phase transition is the ‘dual track system’. This basically an approach to maintain the traditional planned system while implementing some market system approaches. This approach was derived from the idea to make a change while maintaining stability and key government priorities. The dual track system does not mean, however, that the system was divided into two methods of ownership. Rather, we could say that the already existing companies and economic organizations were given the freedom follow a market system approach as long as they kept intact with the important aspects of the previous planned system. The second aspect was the commitment to eventually grow out of the planned economic system. The Chinese system gradually outgrew from its obligatory stage of a planned system and enterprises began to realize the need to focus on market prices rather than the planned economic prices. Thus the focus began to change towards the market system and the planned expectations that were needed to be met were basically regarded as a lump sum tax. Therefore eventually the Chinese system automatically had to move on to the market system approach. The third aspect of the phase was the introduction of contracts to state owned enterprises. Planners signed individual contracts with state owned enterprises in order to introduce a tax payment plan. The tax plan was drawn up according to the firm’s performance the previous year. The interesting thing is that the tax plans were different from that of the market systems in that it was individualistically specific. Also another interesting aspect we can see is that the Chinese government was trying to find a way to safely transfer the state owned organizations system to one that would go well with the market system. The fourth aspect of the phase was lowering the barriers of entry. Previously, the system was completely a government central monopoly. However, China lowered the entry barriers in most of the lucrative manufacturing sectors giving mainly rural industries to make profits from the industrial sector. This was possible because of the large size and diversity of China itself and also the large role that rural and local governments already played in the economy before the reform itself which allowed competition among these local government run firms in the public sector. The fifth aspect of the phase was flexible prices in regard of the supply and demand of the economy. Basically this means that the price system became more liable when representing the product value in the market than in the planned system. The government allowed this decontrol of price on mainly consumer goods. Also another break through with this aspect was that the government allowed interaction between state and non state sectors. This caused and allowed enterprises to find ways to minimize their costs by interacting with suppliers able to supply at cheap prices. The sixth aspect was the managerial reforms of the state firms. The state firms were facing more and more competition and the government needed to find a way to maintain the firms in such an environment. What they did was they shifted their focus on profit making from the previous focus on plan fulfillment. This change however, did not mean that the state enterprises were privatized. The seventh aspect was the disarticulation of successive sections of the economy. The sectors which were considered not to have a significant link to the planned economic system such as in the countryside were allowed to disarticulate themselves as long as it provided the necessary grain. The eight aspect was the initial macroeconomic stabilization using the planned system. In the beginning of the reforms China faced serious macroeconomic problems. Thus China had to reallocate its resources to the urgent sectors. China did not however follow the ways of other socialist countries and maintained their planned structure to reallocate resources into the necessary sectors. This fast reallocation would not have been possible if China did not use the planned economic system. The last aspect of the first phase reform was the high saving and investment. This allowed the government to reduce their share of the GDP which was already going on due to the low revenues that it was making since the government was letting go of parts of the economy. Thus the macroeconomics of China was now in the hands of the market system rather than the Chinese central government as before. 3. Please summarize the second phase of reform of China' (point out the basic status of China’s reform at present) The second phase of the reform, which started from 1993-the present was different in some aspects with the first phase. The main aspects of the second phase were the strengthened institutions of the market economy mainly focusing on the financial sector and regulations. Also the dual track system needed to be unified in a market system approach. This made the government do two things. First they down sized the state sector allowing aspects of privatization to come in to play. At the same time, however, the government recentralized resources and macroeconomic control. First of all, the dual track system had finished its cause because the planning system was no longer necessary. The government eventually got rid of the plan all together by the end of the 1993s. The Chinese, although on its way to the market system, chose to recentralize. This was because the government wanted to control the necessary resources. Also the government needed to strengthen its position in the regulatory and macroeconomic functions. To do so it needed to have a stable and reliable income source. Thus the government also strengthened its income through a tax reform. So basically the Chinese government decided to recentralize a little in order to prevent a fiscal crisis. Also the government went with macroeconomic austerity in order to give enterprises the ability to restructure themselves in accordance with the market system. The government focused on ‘growing out of the planned system’ and create a level playing field. To do so it reformed a lot of its fiscal and tax system. They also restructured the banking and financial system with the change of austerity. By the end of 1993, the Chinese government authorized corporate governance in order to change the structure of the state owned companies as well making its way towards a regulatory state. With all these reforms in progress China opened up its economy to the outside world. In 2001 China joined the WTO (to do this China required lots of advantages and regulations in order to protect its still growing economy). This was a great step towards China’s role in the world economy. The outcomes of these policies were mainly privatization of the Chinese economic system through the downsizing and restructuring of the state sectors. However, one setback of this process was that the government had to lay off the majority of its state workers. The current status of China is to minimize these shortcomings and reduce the critical losses that the vulnerable sectors in the economy may face due to the reforms. In short the Chinese also have to come up with effective policies to both cushion the negative impacts that the policies may have in unfocused areas of the economy and also integrate itself carefully and effectively into the world economy.