The_Rise_of_China

1. Introduction In 1978, after years of having a centrally planned economy where all companies were owned by the state, the government of China (under the leadership of Deng Xiaoping) embarked on a major economic reform program whose goal was to generate adequate surplus for financing the modernization of the Chinese economy (Hu , 2005). By nearly all accounts, the strategy has worked spectacularly” (Hu & Khan, 1997, p.1). With just over three decades following the economic reforms, China boasts remarkable economic success. The country has rapidly become the world’s fourth-largest economy, with over US$2 trillion in terms of aggregate GDP at market exchange rates (Yueh, 2007).[1] Furthermore, China is the world's biggest holder of foreign reserves with its currency stockpile topping US$2 trillion (Research institute of economy, trade and Industry, 2009). All developments come at a cost and there have been negative externalities associated with the economic growth. One of the biggest concern is the impact of China`s activities on the global environment. These impacts have not only been felt in China and its surrounding countries, but it has become a global issue that has called for attention across the world. Environmental issues such as this have become a leading cause of social unrest in China and around the world (Smecker, 2009). This essay employs a two-sided approach by first looking at the Chinese experience (from which some general lessons can be drawn by other developing countries) before attempting to understand the implications of the rise of China on the global environment. The final section concludes. 2. Factors Behind the Rise of China As stated by Yueh (2007), economic reforms in China were part of a ‘partial’ reform strategy. China’s heavily managed reforms were in some aspects conflicting with Adam Smith’s free market paradigm of economic success which has its roots in the market’s invisible hand. On the contrary, Chinese theorists (emulating their nineteenth century Japanese predecessors) based their strategy in the work of Friedrich List, a less popular classical economist (Keidel, 2008).[2] For simplicity we will analyze the reforms using three distinct time-frames. i. Promoting the Rural Economy (Late 1970s – Early 1980s) According to Hu (2005), the first reforms took place in the late 1970s and early 1980s which saw the establishment of the contract responsibilities system in agriculture.[3]The system gave rise to Township and Village Enterprises (TVEs) in rural areas which instilled market orientation into the rural economy while simultaneously absorbing surplus labour (creating employment) in the agricultural sector. Furthermore, the Household Responsibility System incentivized farmers to retain some return on their effort while higher prices for agricultural products led to more productive households and more efficient use of labour (Yueh, 2007). These reforms re-allocated national saving to households, created a profit motive in the economy and transferred labour to more productive enterprises. Output grew rapidly in the early 1980s, leading to the observation by economists that China’s growth originated in the countryside. Hu & Khan (1997) go on to claim that the resulting rapid growth of village enterprises drew millions of people from traditional agriculture into higher value-added manufacturing. In fact, “prior to the 1978 reforms, nearly four in five Chinese citizens worked in agriculture whereas by 1994, only one in two citizens did” (Hu & Khan, 1997, p.5). ii. Special Economic Zones (Late 1980s – Early 1990s) By the end of the 1980s, China adopted an ‘open door’ policy by establishing special economic zones (SEZs) (Hu, 2005). These zones were basically export-processing zones that were open to the rest of the world. The integration of market forces into SEZs allowed the government to experiment with a restricted degree of opening. In addition, following early success of the first batch of SEZs, China created further forms of SEZs, such as Free Trade Zones and High-Technology Development Zones (HTDZs), which were aimed at attracting foreign investment in technology sectors while concurrently promoting research and development (Yueh, 2007). The result was growth of high and medium technology goods which led to the impressive upgrading and performance of Chinese exports which by the year 2000 accounted for 30% of GDP as compared to 15% in 1990.[4] This foreign money, from the view of Hu & Khan (1997), is responsible for creating jobs, linking China to international markets, and led to technology transfers which eventually fueled productivity growth in domestic industries. iii. Reforming the Banking & Financial Sectors (Late 1990s – Early 2000s) Earliest reforms in the banking sector saw the establishment of a two-tier banking system with the central bank as the primary bank and four specialized banks that were owned fully by the central government (Shirai, 2001).[5] The reforms of the late 1990s focused on dealing with insolvency in the banking system. According to Zdenek (2007), the objective was to transform major banks into internationally competitive commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls as well as desirable profitability. Bank restructuring ensued, through the cleaning up of non-performing loans (NPLs) and extensive publicly‐financed bailouts, particularly in the four largest state-owned banks. Through this ordeal, the country's four major banks, which had been burdened with a considerable amount of toxic loans have emerged strong and become among the world's top three banks in terms of market value of shares (García-Herrero, 2006). Furthermore, China’s cautious steps towards the capital account liberalization geared it into becoming the world's biggest holder of foreign reserves with its currency stockpile topping US$2 trillion. A great portion of the reserves is being invested in U.S. treasury securities. Today, China money has become a major player in the determination of the exchange and interest rates of the U.S. dollar and other key currencies, taking over the role once played by the Japanese Yen (Research institute of economy, trade and Industry, 2009). 3. China and the Global Environment i. What China’s Economic Growth Means for the Global Environment With China’s impressive economic growth rate, there has also been a growth in its CO2 emissions[6]. As a result of the successful reforms that began over thirty years ago, China has been able to expand its capital intensive industry and its fixed capital investments. The effects of these expansions have a direct impact on the sporadic rise of global climate change. China's CO2 emissions accounted for two-thirds of the global CO2 increase of 3.1% in 2007(Yunfeng & Laike, 2010). Also China’s energy and electricity supply is mainly powered by cheap resources like coal - a major contributor of high CO2 emission. China has over the years invested in coal to power its energy and electricity sectors[7]. As a consequence of China’s booming coal industry, acid rain precipitates on at least 14% of its own country as well as on Japan and South Korea – damaging crops, woodland, and water ecosystems. To make matters worse, as a result of China’s gorging coal industry, 25-40% of all mercury emissions in the world come from China– a statistic that will steadily climb if China’s economic gait is not tapered (Smecker, 2009). Chinese multinational corporations have spread their wings as well, maximizing their investments in capital intensive industries in Africa, Latin America, and Southeast Asia, in search of resources to further fuel China’s economy. This could bring about a negative impact in these countries. For example in Angola where China has made significant contribution to their oil industry, activities in this sector without proper prevention of CO2 emissions will increase temperature levels in this country. A research done by Dell, Jones and Olken (2008) states that in developing countries a 1◦C rise in temperature in a given year reduces economic growth by 1.1 percentage points on average. Furthermore, in Angola where subsistence agriculture provides the main livelihood for most of its people (with 85% of its labour force employed in this sector), a rise in temperature and other effects of carbon emissions could immensely bring about a decline in their agricultural outputs, which would lead to unemployment, amongst other implications. On the forestry front, China’s timber imports have more than tripled over the last ten years. China’s demand for lumber wills most likely increase by 33% in the following five years. At this rate one can image the rate at which the global ecology will be distorted (Yunlong, 1997).Considering the tightly woven interrelations that life’s complex natural communities have with each other, these constant disturbances to ecosystems could lead to species endangerment, land degradation and water/air pollution. Desertification is also on the rise. Although China is losing much of its countryside to the Gobi desert each year, Africa is getting hit hard and will perform worse if the global economy recovers. Projections show that by 2025, two thirds of arable land in Africa will be swallowed up by desertification resulting in population displacement, not due to Africa’s own emissions, but directly on account of the industrialized/developing countries like China (Smecker, 2009). ii. China’s Trade and its Contribution to Global Warming A pronounced relationship between Climate change and its effects on trade, vis a vis was signaled by the publication of a report championed by the World Trade Organization (WTO) and the United National Environmental Programme (UNEP) (2009) titled Trade and Climate Change. The export of non-biodegradable product in China exemplifies the impact China’s trade has on global climate change. Further examples of the impact of China’s trade on global climate change are provided below: • A rising sea level in China poses a danger to the coastal regions where most of the production outputs for exports take place. If flooding occurs as a result, multiple factories would be closed down, causing a direct decrease in import supply for dependent countries. • Global warming has also negatively impacted the staples industry, where china has been making progress.[8] The Chinese government said in January 2007 that the nation's production of staples such as corn, rice and wheat could drop by as much as 37 percent over the next 50 years as a result of climate change. This would mean that there would be a higher demand for grain worldwide at higher prices and could cause a shortage of grains in some developing and underdeveloped countries.[9],[10] It should be noted that since China is one of the world’s largest exporters with products from its manufacturing sector being subsequently transported overseas. Their main trading partner which happens to be high income industrialized countries like the US, have contributed to the rapid growth in the carbon emissions. In a report by Yunfeng and Yaike (2009) it is noted that 10.03–26.54% of China's CO2 emissions are produced during the manufacture of exports. However, the CO2 emissions embodied in China's imports accounted for only 4.40–9.05% of that. This means that if there was less demand in Chinese products will result in a reduction in CO2 emissions. 4. Conclusion The Chinese experience presents several general lessons for other developing countries. While acknowledging that capital investment is crucial to growth, it becomes even more effective when coupled with market-oriented reforms that introduce profit incentives to the economy. In the view of Hu & Khan (1997), such a combination can unleash a productivity boom that will propel aggregate growth. In the context of developing countries[11], the experience is particularly relevant as it provides policy makers with an alternative tool for combating unemployment. By encouraging the growth of rural enterprises and not focusing exclusively on the urban industrial sector, China has successfully moved millions of workers off farms and into higher value-added manufacturing (refer to section2 part i). Despite China’s rapid economic growth engineered by its successful reforms, there have been negative impacts on the global environment. While acknowledging that total productivity growth is likely more sustainable in the long run, it has been shown that a growth in labour productivity can also lead to an impressive growth of economy. Developing countries especially need to bear this in mind when deciding on areas of expansion and investment. This is imperative, because a move towards more capital intensive economy without proper environmental regulation and management could lead and contribute to the adversities of global warming. Finally, China’s increasing environmental challenges have signaled the need for a more active role from the WTO and UNEP in addressing the effect of trade on the global environment. Bibliography: Garcia-Herrero, A. (2006). China's Banking Reform: An Assessment of its Evolution and Possible Impact. Oxford Jounals : Economic Studies , 52 (2), 304-363. Accessed http://cesifo.oxfordjournals.org/cgi/content/abstract/52/2/304 Hu, V. (2005). The Chinese Economic Reform and Chinese Entrepreneurship. X' Jornada d' Economia , 2-7. Accessed http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023535.pdf Hu, Z., & Khan, M. (1997). Why is China Growing so Fast. IMF: Economic issues , pp. 1-16. Accessed http://www.imf.org/external/pubs/ft/issues8/issue8.pdf Joint Global Change Research Institute and Battelle Memorial Institute, Pacific Northwest Division. (2009). China: The impact of CLimate change to 2030. National Intelligence Council. Keidel, R. (2008). China's Economic Rise- Fact and Fiction. Policy Brief , 51, pp. 1-16. Accessed http://www.carnegieendowment.org/files/pb61_keidel_final.pdf Melissa, D., Olken, B., & Jones, B. (2008). Climate Shocks and Economic Growth: Evidence from the Last Half Century. NBER Working Paper . Production Indices - Angola. (2009, JUne). Retrieved February 16, 2010, from Food and Agriculture Organization of the United Nations: www.faostat.org Research Institute of Economy, Trade and Industry . (2009). China as Number 1. Toyo Keizai Inc. Accessed http://www.rieti.go.jp/en/china/09092401.html Shirai, S. (2001). Banking Sector Reforms in the People's Republic of China : Progress and Constraints. pp. 49-95. Accessed http://www.unescap.org/drpad/publication/fin_2206/part3.pdf Smecker, J. F. (2009, May 21). What China’s Economic Growth Means for the Global Environment. Accessed http://www.towardfreedom.com WTO and UNEP Report. (2009). Trade and Climate Change. World Trade Organisation . Yueh, L. (2007). The Rise of China. Irish Studies in International Affairs , 35-43. Accessed http://www.ria.ie/cgi-bin/ria/papers/100681.pdf Yunfeng, Y., & Laike, Y. (2010). Chian's foreign trade and climate change: A case study of CO2 emissions. Energy Policy , 350-356. Yunlong, C. (1997). Vulnerability and adaptation of Chinese agriculture to global climate change. Chinese Geographcal Sciences , 289-301. Zdenek, K. (2007). Banking Reform in China: Driven by International Standards and Chinese Specifics. MPRA (pp. 1-2). Warsaw: Munich Personal RePEc Archive . Accessed http://mpra.ub.uni-muenchen.de/7320/1/MPRA_paper_7320.pdf ----------------------- [1] When the figure is adjusted for Purchasing Power Parity (PPP), China is the second largest economy. See (Yueh,2007, p.35) [2] List underscored the importance of making the State an integral player in Policy development. He advocated on Selective protectionism and promoting “Champion” Industries. [3] A system by which households could sell their surplus produce to the market. See (Patnaik, 1987, pp. 34-61) [4] The Special Economic zones only took off in 1992. [5] “Four banks” hereafter refer to the Big four banks- Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China and China Construction Bank. [6] This is also known as carbon emissions. In other environmental literature, this words are interchanged with - Green House Gases (GHG) [7] On average Chinese steelmakers use one-fifth more energy per ton than the estimated international average. [8] 'µÊÚáD For example in the grain industry, China is 95% self sufficient in terms of its grain supply which means that only 5% of grain are imported [9] China’s drought crisis in 2008 is believed to have had a direct influence on the world food crisis (2008), thus proving the inter-relationship between future drought and possibility of a future food crisis [10] A shortage in food, could lead to social unrest in countries affected [11] Especially countries with high unemployment rates and an underproductive agriculture sector.