QUESTION

By adopting a free market economy since the 1970’s China’s economy has grown to be one of the largest in the world today. This proves that free market economy is better for China compared to a centrally planned system”.

Critically analyse this view and explain the challenges facing China’s economy today.

SOLUTION

Free market economy means the most ideal market form  of economy where buyers and sellers are permitted to interact freely which implies that demand and supply operate in the market economy without any government or state intervention and there is just mutual agreement of price between eth buyers and seller. The best examples of free markets are the financial markets or the foreign exchange markets (Free Market, 2012). However it is found practically that free market economy where the resource allocation is based upon the supply and the demand of the resources is just a theoretical concept. Even the capitalist countries do apply some restrictions on the exchange of the commodities and the ownership too (Moffatt, 2012).

The economic reforms in China’s economy had undergone two decades of change by the end of 1998 and through these two decades the economy of China transformed from a centrally planned economic system to a market economy has been very gradual and experimental (Qian and Wu, 2000). The supporters of new institutional economists think that a thriving market economy needs to get the institutions right (Williamson, 1995) (North, 1990) (Coase, 1988)as they think that it will be focussed on the liberalisation, privatisation and stabilisation. They feel that a set of institutions which are needed for successful transition from the planned market system  to free economy are critical needs for sustained growth which includes the secured private property rights given full protection by the rules of law, appropriate government regulations which will foster market competition,  financial systems which are transparent, development of an independent judiciary which will being impartial enforcement of  contracts in the market (Qian, 2002).

The blueprint was adopted by China following the Russian failure but in contrast China achieved and created its own path which leads to success (Stigliz, 1999).

A deep probe has been done into the Chinese reforms which were introduced since the 1970’s while discussing the successful Chinese economic reforms it has been found that gradualism has played quite important role and initially the agrarian reforms has been planned and the political mechanisms were found to be underpinning the reforms in the central government (Shirk, 1994) (Shirk 1994). According to Shirk more emphasis was given to the organisation of the local governments in a politically manner in order to gain control effectively on the economy the local political leaders should be visualised as creators of system which supports loyalty and patronage (Guo et al., 2005).

In 1978, The Chinese Communist party was taken over by Deng Xiaoping which ended the years of uncertainty and indecisive strategy due to the Cultural Revolution (1966-76) in China. In 1980’s the agricultural or the Household responsibility system (HRS) was successfully implemented followed by eth industrial reform in China which was much more gradual and took smaller steps towards free market economy implementation. By the end of 1988 most of the state owned enterprises (SOE’s) had adopted the contract system in various forms while retaining the bargaining feature of the centrally planned system (Huang, 1999).

Thus a transition in the economy of China was found to be very gradual as in the period of 1978-84 it was found to be dominated by eth centrally planned and supplemented by the market, but during the period of 1985 -87 the commodity economy in China adopted the planned economy version. In eth period of 1992-97 economy was totally a socialist market economy where state ownership was the main form while by 2003 the public ownership in the economy became the main form to enhance the economic development and faster implementation of reforms. It also implemented eth open-door policy.

Thus in the past one quarter China has successfully transformed itself from eth centrally planned market system to a market oriented economy which is much more decentralised and growth oriented too. It has been seen that after every long sessions of China with its centrally planned system related to foreign trade , it gradually moved towards reforms which took it closer to free market oriented economic system (Chi, 2000). Before reforms the CPE of China had major three problems which included that most of its productive enterprises were treated as subordinates to the administrative organs which hampered the economic independence of the organisations. This completely neglected the responsibilities, material interests and thus reducing their enthusiasm and initiatives. Secondly it is found that the system involves a lot of command planning from the top and the CPE is very rigid also. Thirdly everyone has an ‘iron rice bowl’ when the economy is centrally planned because the system has a combined expenditure and income. This means that all the people get guaranteed employment whether they are productive or not and for their income they have to rely on the work done by others.

But with the implementation of the free market economy it has been witnessed that the gross agricultural output grew by more than 5% annually (National Bureau for Statistics, 2003). Industrial sector was too following the footsteps of agricultural sector but too slowly and gradually and were misguided also in 1980’s, had they adopted more radical and timely approach the scene for the industrial  sector’s economic performance would have been different.

In case of bureaucratic reforms the younger and more educated bureaucrats have been replacing the older revolutionary veterans during these economic changes. It has been found that the young leaders supported these economic reforms and were more pragmatic and adaptable in their approach and were found to be much more competitive than their predecessors (Li, 2004).

But there were some negative effects also linked to these reforms like the co-operative medical care system which worked very well in rural areas before reforms was abolished due to HRS. At the same time the old age cadre’s buying-out plan also had negative impact on economy. The enormous rise of taizidang led to rise of social and economic corruption in China, however all these negative impacts were too mild to bother at large scale.

But after studying the Chain’s gradual reform implementation through dual track which led to the turning of Chain’s economy into free market from CPE we can say that it has witnessed growth and success in great manner. Thus we can very well say that in the past two decades the reforms which occurred in China have been able to achieve the economic efficiency by utilising the standard forces like incentives and competition along with making the reforms a completely win-win situation (Qian, 2002).

Bibliography

Chi, F. (2000) ‘The WTO Accession and the Second Reform in China’, Business Management, p. 11.

Coase, R.H. (1988) The Firm, The Market, and the Law, Chicago and London: The University of Chicago Press.

Free Market (2012), [Online], Available:  HYPERLINK “http://www.investopedia.com/terms/f/freemarket.asp” \l “axzz1o9xSdCBr” http://www.investopedia.com/terms/f/freemarket.asp#axzz1o9xSdCBr  [3 March 2012].

Guo, R., Yang, K., Zhao, R. and Hwang, E.-G. (2005) How to Reform a Centrally Planned Economy: A Case of China, Cairo: Global Development Network.

Huang, Y. (1999) State-Owned Enterprise Reform, Canberra: Asia Pacific Press.

Li, S. (2004) ‘China’s Rural and Urban Income SUrvey’, Journal of Financial Economics, no. 3.

Moffatt, M. (2012) Definition of Free Market Economy, [Online], Available:  HYPERLINK “http://economics.about.com/cs/economicsglossary/g/free_market_e.htm” http://economics.about.com/cs/economicsglossary/g/free_market_e.htm  [3 March 2012].

‘National Bureau for Statistics’, China Statistical Yearbook (2003).

North, D.C. (1990) Institutions, Institutional Change, and Economic Performance, New York: Cambridge University Press.

Qian, Y. (2002) How REform Worked in China, Princeton , New Jersey: Princeton University Press.

Qian, Y. and Wu, J. (2000) ‘China’s Transition to a Market Economy:How Far across the River?’, Conference on Policy Reform in China, Stanford University.

Shirk, S. (1994) How China Opened Its Door, Washington, DC: Brookings Institution.

Stigliz, J.E. (1999) ‘Whither Reform? –Ten Years of Transition’, Keynote Address to the World Bank toAnnual Bank Conference on Development Economics, Washington, DC.

Williamson, O.E. (1995) The Economic Institutions of Capitalism, New York: Free Press.

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