Key factors in China’s rapid economic growth

6 Mar

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From 1978 to 2014 China has undergone a massive transformation, going from the tenth largest economy with a GDP of approximately 150 billion USD, to the second largest economy with a GDP of approximately 8.5 trillion USD respectively. (WIKI). The question we must ask is what factors have been responsible for this giant leap from a dying empire to an economic giant.

 

The first factor, but by no means the most important was the act of opening up its borders to the rest of the world, this was very beneficial in that it allowed foreign direct investment (FDI) to occur, before 1978 investing in Chinese firms as a foreigner was very difficult thereby discouraging the majority from doing so, this is not the case post 1978. In addition to this, opening up its borders to the rest of the world allowed China to make gains from trade and benefit from its comparative advantage. This notion is a simple economic theory established by many notable economists, for example Adam Smith in “The Wealth of Nations,” and by David Ricardo. To put it simply these economists argue that by allowing free trade both countries will be made comparatively better off than if they refrained from trade. This factor is highlighted in the fact that before 1978 China imported around 7.5 billion USD (1975) however post 1978 China imported around 42 billion USD (1985). (Chinability) This factor is further highlighted in China’s steel production industry, if left to domestic production of iron ore China would be unable to meet the world’s demand of Steel, however due to trade China can import iron ore from abroad, thereby allowing China to control almost 50 percent  (2013) of the steel market. (ISSB)

 

Another important factor is China’s growth in productivity, capital and technology. In the period of 1979-1994 China’s stock of capital grew by approximately 7 percent. (IMF). With new and more capital a country can increase its output and make the country more productive. This increase in capital can be attributed largely to FDI. In addition to this due to the loose enforcement of copy right legislation in China, production firms in China were not tied down by “red tape,” for example Chinese firms could for the most part ignore patents, thus allowing them to copy successful foreign firms. Despite large increases in capital stock, the capital to output ratio has stayed fairly level fluctuating between 8 to 12 percent. (NBER). This therefore suggests that changes in labour also played a large role. There are two aspects to changes in labour, the first being an increase in the labour force, for instance an increase in immigration will increase the labour force, this aspect will be covered in the following paragraph. The second aspect is an increase in labour productivity, for instance an increase in productivity of the average worker caused by an increase in education would result in the ability of the average worker to produce a certain good in a set time to increase. This would mean that while the number of workers remained the same the effective number of workers would increase. The aspect of an increase in productivity is beneficial to China’s economic growth in that it helps attract FDI, which helps explain the increases in capital investment as mentioned earlier. In the period of 1979-1994 China’s labour productivity grew by on average 3.9 percent per annum. A staggering figure when compared to the US’s 0.4 percent in the same period. This increase in productivity can be attributed to broad range of reforms, for instance business reforms that allowed farmers to keep a portion of their produce thus encouraging them to become more efficient, education reforms.

The final factor I will talk about is the large number of reforms. As mentioned earlier the increase in China’s labour force can be attributed to these reforms, these reforms helped move China away from an agricultural based country to a manufacturing giant. This factor is highlighted in the fact that before 1978 around 80 percent of the labour force worked in agriculture but by 1994 this figure had dropped to below 50 percent. The range of reforms also helped move the Chinese people away from outdated beliefs and techniques to more modern beliefs and techniques, this change in belief is also reflected in the movement away from old fashioned processes in mining, agriculture etc. to more modern and more efficient techniques.

To put it simple it was the opening of borders that allowed FDI to occur and it was the leaps in productivity that attracted FDI, but it was the large range of reforms that allowed both of these factors to occur.

Jimmy

China’s imports and exports, Chinability, http://www.chinability.com/Trade.htm

Top 15 crude steel producers, ISSB, http://www.issb.co.uk/global.html

National bureau if economic research, NBER, http://www.nber.org/digest/jul07/w12755.html

Why is China growing so fast, IMF, https://www.imf.org/EXTERNAL/PUBS/FT/ISSUES8/INDEX.HTM

List of countries by GDP, wiki, http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

 

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