Question

China's Fifth cyclical Economic (1978-1980)

Need 2000 words with full description.

China's Fifth cyclical Economic crisis(1978-1980)

Answer 1

Starting from the beginning of China's reforms in 1978, its economy has developed in stages of first rapid growth, and then sluggish growth. Given these fluctuations, China's economic growth has averaged more than 10 per cent in real terms since 1990 and nearly that fast since 1978 over the entire period. Nevertheless, on the negative side, an study of the growth cycles in China shows that every rapid and slow phase since the mid-1980s has undermined the rural economy. By 2005, the difference in per capita consumption between rural and urban areas had effectively returned to its pre-reform point of 1978, after significantly rising through the mid-eighties and staging a moderate recovery in the mid-nineties.

Prior to 1979, China developed a centrally controlled economy, or order, under the leadership of Chairman Mao Zedong. The state regulated and managed a significant portion of the country's economic performance, which set production targets, managed prices, and distributed resources throughout most of the economy. All of the individual household farms in China were collectivized into large communes during the 1950's. In the 1960s and 1970s, the central government conducted major investments in physical and human resources to enable rapid industrialization. As a result, almost three-fourths of industrial output was produced by state-owned, centrally managed enterprises (SOEs) by 1978.

The Chinese Government's main objective was to make China's economy largely self-sufficient. In general, foreign trade was limited to purchasing those products which could not be produced or purchased in China. These policies created economic distortions. Because most facets of the economy were owned and controlled by the central government, there were no market structures for efficiently allocating capital, and therefore there were little opportunities for companies, employees, and farmers to become more competitive or to be concerned with the quality of what they produced (because they concentrated primarily on government-set output goals).

According to statistics from the Chinese government, China's real GDP grew at an average annual rate of 6.7% from 1953 to 1978, although the accuracy of these figures was challenged by several observers, some of whom claim that Chinese government officials (especially at the subnational level) frequently inflated production rates for a variety of political reasons during this time. Economist Angus Maddison places the actual annual average real GDP growth in China at about 4.4 per cent during this time.

Moreover, under Chairman Mao Zedong's leadership, China's economy suffered major economic downturns, including during the Great Leap Forward from 1958 to 1962 (which led to massive famine and estimated the deaths of as many as 45 million people)6 and the Cultural Revolution from 1966 to 1976 (which caused widespread political turmoil and significantly disrupted the economy). From 1950 to 1978, China's GDP per capita on the basis of purchasing power parity (PPP),7 a common measure of living standards for a nation, doubled. Nevertheless, Chinese living standards dropped by 20.3 percent from 1958 to 1962, and they dropped by 9.6 percent from 1966 to 1968.

In 1978, (shortly after Chairman Mao's death in 1976), the Chinese government agreed to break from its Soviet-style economic policies by slowly reforming the economy on the basis of free-market principles and opening up trade and investment with the West, in the expectation that this would greatly improve economic growth and living standards. China introduced several economic reforms starting in 1979. Price and ownership incentives for farmers were introduced by the central government, which enabled them to sell a portion of their crops on the free market.

Furthermore, the government set up four special economic zones along the coast to draw foreign investment, raise exports, and import high-tech goods into China. Additional reforms, which followed in stages, attempted to decentralize economic policymaking in various sectors, especially trade. Provincial and local governments were granted economic control over different companies, which were usually permitted to function and compete on free-market principles, rather than under the supervision and guidance over state planning. Additionally, it allowed people to start their own businesses.

Furthermore, the government set up four special economic zones along the coast to draw foreign investment, raise exports, and import high-tech goods into China. Additional reforms, which followed in stages, attempted to decentralize economic policymaking in various sectors, especially trade. Provincial and local governments were granted economic control over different companies, which were usually permitted to function and compete on free-market principles, rather than under the supervision and guidance over state planning. Additionally, it allowed people to start their own businesses.

In general, analysts attribute much of China's rapid economic growth to two key factors: large-scale capital spending (funded by massive domestic savings and foreign investment) and rapid productivity growth. Those two variables seem to have gone hand in hand together. Economic reforms have resulted in higher economic productivity which has improved production and increased capital for additional economic investment. Historically, China maintained a strong savings rate. As reforms started in 1979, domestic savings stood at 32 percent as a percentage of GDP. Most of China's savings during this period, however, were created by SOE profits

Economic reforms, which included economic production decentralization, resulted in substantial increases in Chinese household savings as well as corporate savings. As a result, China's gross savings are the highest among the major economies as a percentage of GDP. The large degree of domestic savings has allowed China to support high investment rates. Nonetheless, China's gross domestic savings rates far outweigh its domestic investment rates, making China a major global net lender.

Most analysts have argued that productivity gains (i.e., performance gains) were another significant factor in China's rapid economic development. Improvements in productivity were largely caused by resource reallocation to more productive uses, especially in sectors that were formerly heavily dominated by central government, such as agriculture, trade, and services. Agricultural reforms for instance boosted efficiency, freeing employees to seek employment in the more competitive manufacturing sector.

China's economic decentralization contributed to the emergence of non-state companies (such as private firms), which appeared to undertake more competitive activities than central SOEs and were more market-oriented and effective. In addition, a greater share of the economy (primarily the export sector) has been exposed to competitive forces. Local and regional governments were authorized to create and operate different businesses without government intervention. Additionally, FDI introduced new technologies and processes in China that boosted performance.

However, as China's technological development begins to converge with major developed countries (i.e., by adopting foreign technology), its level of productivity gains and thus real GDP growth could slow significantly from its historic pace if China does not become a major center for new technology and innovation and/or introduce new comprehensive economic reforms

World Bank classifies growth rates of economies using the definition of gross national income (GNI) per capita.16 According to the World Bank, China progressed from a low-income economy to a low-middle-income economy in 1997 and became a high-middle-income country in 2010. The per capita GNI of China in 2017 (at $8,690) was 38.7 percent below the amount that China would need to reach in order to become a high-income economy. The Chinese government expects China will reach the threshold of high-income by 2025. It hopes that this will be accomplished primarily by making innovation a significant source of potential economic development.

Many economists claim that using nominal exchange rates to translate Chinese (or other countries) 'data into U.S. dollars does not represent the true scale of the economy and living conditions of China compared to the U.S. Nominal exchange rates clearly reflect foreign currency prices against the US dollar and these calculations exclude variations in goods and services prices across countries.

To explain, there will be one U.S. dollar traded for local currency in China purchasing more goods and services than in the U.S .. This is because the prices of goods and services in China are usually lower than in the US. Across Japan, on the other hand, prices for products and services are typically higher than in the US. Therefore, a dollar traded for local Japanese currency would buy there less goods and services than it would buy in the US.

Economists tend to create exchange rate figures based on their real buying power compared to the dollar in order to allow more precise country- comparisons of economic statistics, generally referred to as purchasing power parity. China's share of global GDP on a PPP-based basis grew from 2.3% in 1980, while the US share of global GDP on a PPP-based basis fell from 24.3% to an estimated 15.3%.20 This will not be the first time in history that China was the world's largest economy in terms of China's economic ascendancy as the world's largest economy, especially given that China's GDP was impressive in 1980.

The dramatic rise in China's foreign FDI outflows in recent years appears to be guided primarily by a variety of factors, including Chinese government policies and initiatives to encourage firms to "go foreign." The government intends to use FDI to gain exposure to IPR, technology, know-how, popular brands, etc., to push Chinese firms up the value-added chain in manufacturing and services

China's surplus of low-cost labor has made it competitive globally in many low-cost, labor-intensive manufacturing sectors. As a result, imported goods make up a large portion of the trade in China. A large amount of China's imports consists of parts and components which are assembled into finished goods, such as consumer electronic items and computers, and then exported. In China, the value added by Chinese employees to these goods is mostly comparatively low compared with the overall value of the commodity when shipped abroad.

China is undergoing an significant overhaul of its economic model at present. Policies that have been employed in the past to achieve essentially rapid economic growth at any expense have been quite productive. These policies, however, have entailed a number of costs (such as heavy pollution, growing income disparity, overcapacity in many sectors, an unstable financial system, increasing corporate debt, and various economic imbalances) and so many analysts find the old growth model no longer sustainable

China has sought to develop a new growth model ("the new normal") that promotes more sustainable (and less costly) economic growth that puts greater emphasis on private consumption and innovation as the new drivers of the Chinese economy. Implementing a new growth model that supports sound economic growth could prove challenging if China is not able to implement new economic reforms effectively. Many analysts warn that China may face a time of stagnant economic growth and living standards without such reforms, a situation which economists refer to as the "middle-income trap"

The relative absence of the rule of law in China has led to systematic government corruption, financial speculation and investment fund misallocation. Policy "connections," not market forces, are in many cases the main determinant of productive firms in China. Many US companies consider business in China difficult because rules and regulations are generally not clear or transparent, contracts are not easily implemented and intellectual property rights are not covered

China has recently requested cooperation with the U.S. to extradite 150 suspected corrupt officials who have fled to the U.S. However, other critics contend that government anti-corruption efforts are mostly used to settle political scores with out - of-favor officers. Many observers suggest that the Xi anti-corruption push of President is all about consolidating his own agenda than instituting reforms. However, there are some signs that the new anti-corruption movement could have a negative effect on the Chinese economy due to some local officials 'reluctance in undertaking projects that they fear may lead to central government scrutiny

China retains a weak and fairly decentralized system of government to control China's economic activity. Laws and regulations sometimes go unenforced or are ignored by officials in the local government. As a result, a lot of businesses cut corners to increase profits. This has contributed to a proliferation of unhealthy food and consumer goods sold in China or shipped to other countries. The presence of a huge and underemployed population was a major factor in China's rapid economic growth when it first implemented structural reforms. Such a huge workforce meant that businesses in China had access to an almost infinite supply of low-cost labor, which allowed other businesses to become more competitive,