A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization, where market forces set prices rather than a central planning organization. In addition to this trade barriers are removed, there is a push to privatize state-owned businesses and resources, and a financial sector is created to facilitate macroeconomic stabilization and the movement of private capital.
The process has been applied in China, the former Soviet Union and Communist bloc countries of Europe, and many third world countries and detailed work has been undertaken on its economic and social effects.
The transition process is usually characterized by the changing and creating of institutions, particularly private enterprises; changes in the role of the state, thereby, the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises, markets and independent financial institutions. In essence, one transition mode is the functional restructuring of state institutions from being a provider of growth to an enabler, with the private sector its engine. Another transition mode is change the way that economy grows and practice mode. The relationships between these two transition modes are micro and macro, partial and whole.
China’s Economic Transition, a Great Success
“During the process of economic transition over the past two decades, China has been pursuing a path of development in line with the reality of the country. As a result, China’s GDP, on average, advanced by 9.3 percent each year from 1978 to 2000”.
The growth of the Chinese economy in the past few decades since economic reform in 1979 has been one of the wonders of modern economic development. China has experienced unprecedented growth in the past thirty years, with GDP rising on average of about 9.7% per year, with exceptionally strong growth between 2003-2007 averaging about 11% per year.. Indeed, China currently has the fourth largest GDP, measured in nominal US dollars, with the 2006 figure standing at US$2.68 trillion.
Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role – in 2010 China became the world’s largest exporter.
Under the rule of Deng Xiaoping in 1979, China began the long process of transformation from a Soviet-style planned economy, where production decisions were made by the state, to one where market mechanisms would be the main driving force behind economic decisions. The National Party Congress cited a lack of economic growth and an increasing economic divide with the West and other Asian countries as the reason for the change. The changes were not to be a total abandonment of communist principles but to combine capitalist ideologies with Chinese
Reform of Economy
An initial process of reform was proposed to ease the economy gently into its new guise, whereby any significant disparities between an open economy and the Chinese one would be ironed out. Key to this was expansion and liberalisation of the export program, development of major infrastructure, generation of power, and utilisation of raw materials.
The significant problem of food shortages for the sizeable and ever increasing population was one of the first to be addressed. Farmers were given incentives to increase production levels whilst at the same time lowering the costs of production, a scheme which had the effect of greatly increasing food supplies. The authorities believed that the success of this initial trial period in isolated areas warranted a nationwide implementation and so it became; almost the entirety of the country’s farm system was governed by this method come the mid-1980s. The free market mechanism was deepened and led to further increases in production and demand, fuelling farm incomes.
One particularly important development was the new freedom given to company leaders. Although inherent production and decision making differences between agriculture and industry prevented a similar success story to that in agriculture taking place, there were significant gains to be made. Rather than being put in a proverbial managerial straightjacket, business managers were given more freedom to set production targets as well as experimenting with incentive techniques to boost productivity amongst workers. The source of funds for investment was also shifted from zero interest government loans, which did not have to be repaid thus giving no incentives to generate profit.
In addition, to make use of the country’s considerable workforce the government proposed the idea of creating firms which would be collectively owned by workers so that their income would be based on how well the firm performed, again providing an incentive to raise productivity. This also had the knock-on effect of boosting certain sectors the government wished to promote, by allocating these workers to the appropriate areas.
The creation of more independent and market oriented firms meant the appearance of a burgeoning domestic consumer market, with citizens being given a consumption choice that they had never had before. The central government actively encouraged the delegation of production decisions to the market, in spite of underhand measures by local authorities to disproportionately tax private sellers, and the private system expanded to levels where they rivalled their state owned counterparts by the mid-1980s.
China’s Recent Economic Progress
China has started her economic reforms for about 20 yrs and is progressing so well that not unsurprisingly it draws the envy of many countries
China’s economy developed at an unprecedented rate, and that momentum has been held steady into the 21st century. It was only after the liberalization reforms and a cultural counter-revolution in the late 1970s (under Deng Xiaoping initially), that China made appreciable progress.
Massive external (manufacturing) investment was first attracted based on education and cheap skilled labour, while equally massive internal investment has more recently been mobilized in modern infrastructure and urban (including consumer) facilities especially in major cities. Despite China’s intense population pressure, there was no shortage of land as traditional uses were simply demolished to make way – and existing residents apparently compensated with an apartment and better job prospects.
A key feature of China’s rapid growth is seen to have been its ability to reform its economy very quickly to become more efficient . Techniques that encourage and support policy initiative within hierarchies have been developed.
In China’s recent progress it is possible to see lessons learned from
(a) Singapore’s experience in building a modern ‘Chinese’ city with foreign investment
(b) Japan’s neo-Confucian ‘industry policy’ methods and disregard of Western financial disciplines
(c) the Nationalist Party’s preferred cultural alternative to Mao’s version of Communism and
(d) Taiwan’s adoption of some US techniques.
China seems to be attempting to implement a system of socio-political economy that has been little studied and probably can’t be understood in terms of Western analogies or cultural assumptions (for reasons like those outlined in Structural Obstacles).
The short-term result has been an unprecedented and impressive rate and magnitude of gains in China’s real economy and a perception that it has excellent future prospects – even recognizing that it suffers structural defects. Moreover some analysts have recently seen China as a ‘safe haven’ for investors concerns about a US asset bubble, and the structural problems facing Japan and Europe .
It is also argued that that China is playing, and will continue to play, a key role in promoting regional and global collaboration . It is seen to be challenging Japan’s status in Asia, and to be the only country able to sustain a view of the world which is different to that of the US.
China has also been seen as a rising power that will force others to adjust because of factors such as:
its huge human resources and markets;
the emergence of a high class education system;
and the external resources of Greater China
which will provide the skills to allow its structural problems to be overcome.
China-led Asia has been seen to be returning to its historical role at the centre of affairs – which has had a huge impact on the global economic system similar to the long rise of Europe (and its American offshoot) to pre-eminence 500 years ago. Its emergence has (as also in the case of India) been suggested to be simply a restoration of the position which had existed for most of recorded human history .
China has shifted from a unilateral stance in opposition to global institutions to working (often with great effectiveness) within those institutions. A ‘Chinese consensus’ has been suggested to be a better alternative to the (so called) ‘Washington consensus’ (free societies and free markets) for developing economies.
Some have even argued that China is ‘the future of the world’ – undergoing a rapid developmental process, building infrastructure and industrial capabilities that will put it into a position of immense power in 20 years – and replace the US as the world’s dominant power by 2050.
China is seen to have features which are quite different to earlier challenges to the US’s 20th century global dominance (eg Soviet Union, Japan) and to have the potential to create a future Asia-centred economic regime which others including the US can either be part of, or be excluded from.
A popular image now seems to be presented within China of a trendy, super-modern consumer society that will eventually be able to satisfy every material desire.
China’s Economy will flourish
According to me China’s Economy will definitely Flourish for the next coming years.
“Year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times. That seems likely to continue.”
The following point goes on to itemize the whys and wherefores:
STRATEGY, and specifically the latest “5-year plan” that shifts “from the highly successful producer model of the past 30 years to a flourishing consumer society.”
COMMITMENT. That Chinese leadership emphasizes stability, and does so with a vengeance.
WHEREWITHAL TO DELIVER. “More than 30 years of reform have unlocked its economic dynamism…and many more reforms are coming.”
SAVING. A rate of “50% funded the investment imperatives of economic development….China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.”
RURAL-URBAN MIGRATION will continue for 20 years, creating huge demand for China’s massive construction boom.
LOW-HANGING FRUIT: CONSUMPTION. There’s enormous room for domestic economic expansion.
LOW-HANGING FRUIT: SERVICES. The Chinese service sector is just waiting to be developed.
FOREIGN DIRECT INVESTMENT continues, and shows no sign of letting up.
EDUCATION: China is catching up to the rest of the word – fast.
China has huge human resources and potential markets. It has a high class education system, and can draw on external resources (Greater China) for the skills to allow its structural problems to be overcome;
Past obstacles have been successfully navigated, and this process is continuing;
China’s response to indications of over-heating in 2004 were satisfactory because
the problem was addressed by administrative controls rather than raising interest rates and
despite the bad debts of its banking system,
China has large international reserves, a more-or-less balanced current account / a modest fiscal deficit and a closed capital account which prevents capital outflows.
14the 2007 credit crisis illustrates China’s strength. A $1.3tr cash reserve has been built up in the 10 years since the Asian financial crisis – and the Peoples Bank of China believes that this provides insulation against crises elsewhere. Entrepreneurs have flourished in China, and the stock market has risen rapidly. There has been a flight of capital to Asia because of the credit crunch. The US / UK economies are heavily dependent on financial services – and these are in doubt
However, as with all economic ‘miracles’ there has also been a negative side to this development, and such huge growth has had an impact upon many areas of society and the environment.
There became a huge gap between the urban rich and the rural poor, due to the massive incentive and investment programmes targeted in the cities, and to this day the divide remains the one of the largest in the world.
Choking levels of pollution affect a great number of Chinese cities to the extent that China can boast the unenviable accolade of being home 7 of the world’s 10 most polluted cities.
Other environmental concerns include the loss of substantial amounts of arable land, soil erosion and a drop in the level of the water table.
Unemployment has been difficult to contain with huge lay-offs from the previously inefficient state-owned enterprises.
These and other problems show only minor sign of receding in the near future so China faces a struggle to balance its unrelenting modernization with countering domestic imbalances and global environmental concerns.
To overcome these Issues China’s Government can take the following Measures for Improvement :-
Emphasizes should continue economic reforms and the need to increase domestic consumption in order to make the economy Less dependent on exports in the future
Maintaining stable and fast economic growth, with a focus on price stabilization, more job creation, improved balance of payment, and higher quality of growth.
Achieving major progress in economic restructuring, with higher share of household consumption and the service sector, further urbanization, more balanced rural-urban development, lower energy intensity and carbon emissions, and better environment.
Increasing people’s incomes, reducing poverty and improving the living standards and quality of life.
Expanding access to basic public services, increasing the educational level of the population, developing a sound legal system, and ensuring a stable and harmonious society.
Deepening the reforms in the fiscal, financial, pricing and other key sectors, changing the role of the state, improving governance and efficiency, and further integrating into the world economy.
Although China occupies a unique niche in the world’s political economy–its vast populace and large physical size alone mark it as a powerful global presence–it is still possible to look at the Chinese experience and draw some general lessons for other developing countries. Most important, while capital investment is crucial to growth, it becomes even more potent when accompanied by market-oriented reforms that introduce profit incentives to rural enterprises and small private businesses. That combination can unleash a productivity boom that will propel aggregate growth. For countries with a large segment of the population underemployed in agriculture, the Chinese example may be particularly instructive. 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 factories without creating an urban crisis. Finally, China’s open-door policy has spurred foreign direct investment in the country, creating still more jobs and linking the Chinese economy with international markets.