Changes in growth trends among countries coincide with important views on economic policies. Often, a major shift takes place where most developing countries shift to a different economic ideology through the transitioning process. A transitioning economy is one that is changing from a central to a free market economy. Since the collapse of communism in the late 1980’s, many countries of the former Soviet Union sought to abandon central planning and embrace the ‘open-door’ policy of the market. However, many of the countries that explored transitioning after the 1980’s have faced severe short-term difficulties and even longer-term constraints on development.
Any economy is a unique entity with its own characteristics that require its own policies. It must be noted that the sustained growth in successful regions was associated with changes in economic structures and in several other dimensions. Economists trained in the structuralist tradition are of the view that development requires economic transformation characterized by higher productivity and increasing returns to scale.
Economic reforms can be understood as part of a process that includes economic development strategy, macroeconomic policy and a system reform more narrowly defined. In transitional economies, China has had a particular claim to attention. This paper analyses transitional economies with the main focus on China as a country that successfully underwent economic transitioning and, in the process, improved its economic and development state. It will further look at the initial impact of the process of transition followed and how closely China followed the Washington Consensus to reach the economic state that it is in.
China’s transitioning (When it started, transitioning process, how it progressed from late 1980’s to 2005, impact of transitioning process)
China’s adoption of the ‘open door policy’ and radical economic reform from a planned economy to a market economy began towards the end of 1978 (Lin, Cai and Li, 1996). However, the beginning of 1979 marked the first fundamental endeavours to change the economic command since the Yugoslav reforms since the 1960’s (Naughton, 1995). Chinese reforms began in agriculture. When the Chinese transitioning process began, the government did not have a well-designed blueprint, the economic progress was accompanied by political relaxation but no democratization, and even the relaxation was substantially curled out after 1989 (Naughton, 1995). However, since the 1980’s, China has been the fastest growing large economy in the world (Lin et al, 1996), and by a large margin. (Walder, 1995).
Since China’s economy moved in favour of engagement with world markets, their economic reform has been resilient and profound and accompanied by accelerating economic growth that has lifted much of the world’s population out of poverty (Naughton, 1996). Lin et al (1996) documented how China’s average annual rate of GDP growth has been miraculous since the beginning of the transition and how it has become the most successful of the transitioned economies. According to Lin et al (1996), the average gross domestic product (GDP) growth increased from approximately 4 percent prior to the reform to 9 percent after, the trade ratio, which measures the combined value of exports and imports as a share of GDP, jumped from under 10 percent prior to reform to 22.9 percent in 1985, 38.7 percent in 1995, and 63.9 percent in 2005 – a level far higher than comparable figures for any other large and populous nation.
Young (2003) asserted that much of China’s extensive growth comes from adding more labour and capital to the production process. He further reports that productivity improvement accelerated from 0.5 to 3.8 percent per annum after the reform, with productivity change accounting for 40.1 percent of overall GDP growth during 1978-2005, as opposed to 11.4 percent during 1952-1978 and -13.4 percent (i.e., a productivity decline) during 1957-1978 (Young, 2003). Furthermore, “China has also become a major player in the global market for foreign direct investment, receiving annual inflows in the neighbourhood of U.S.$70 billion during 2004-2006 and generating moderate, but rapidly increasing, outflows of direct overseas investment” (U.S.$16.1 billion in 2006) (Brandt and Rawski, 2008).
China and the Washington Consensus
The ‘Washington Consensus’ on structural reforms in emerging markets generally promotes private property rights, strong emphasis on political liberalization, fiscal discipline, macroeconomic stability and economic opening as conditions for aid from the international financial institutions to promote economic growth (Huang, 2010). The disappointing experiences with development aid in the 1960s and 1970s had led to the conclusion that sound macroeconomic policies needed to be backed up by microeconomic reforms to encourage the development of markets and a competitive environment (Huang, 2010). In the context of transition countries, structural reforms such as liberalization and privatization became fundamental ingredients of the transition (Huang, 2010). China, on the other, had followed a different approach known as the Beijing Consensus (Yao, 2011).
The term was introduced in 2004 by Joshua Cooper Ramo, who contended that “China is marking a path for other nations around the world who are trying to figure out not simply how to develop their countries, but also how to fit into the international order in a way that allows them to be truly independent, to protect their way of life and political choices in a world with a single massively powerful centre of gravity” (Ramo, 2004). According to Ramo (2004), the Beijing consensus is ideologically more flexible in comparison to the Washington Consensus. It is based on and committed to innovation-based development and Economic success measured not by per capita GDP, but by its sustainability and level of equality, unlike the Washington Consensus. Ramo (2004) further defines the Beijing consensus as the ‘new physics of Chinese power’, based on how well it has worked for their growth and development.
Ramo (2004) argues that China has thrived by openly ignoring the Washington Consensus, whereas Ziaddin (2016) argues that through the Beijing consensus, China may as well have indirectly followed the Washington Consensus in such a ways that both address the role of GDP in their economies as well as government intervention and financial sovereignty. Ziaddin (2016) further argues that in fact, China adheres to eight of the ten policy prescriptions of the Washington Consensus. However, contrary to the Washington Consensus, the Beijing consensus encourages financial sovereignty through policies of self-determination (Yao, 2011). Furthermore, both consensuses were aimed at promoting development that can be sustained (Yao, 2011).
China’s economic state today
China partakes in globalization on its own terms, which Ramo calls “practicing globalization with Chinese Characteristics” (Ramo, 2004). The government has a large influence on China’s competitiveness in the international market and exerts it by maintaining low labour costs, an undervalued currency, heavy state subsidies to boost the export driven economy, and a highly protectionist market (Ramo, 2004). Foreign investment is carefully orchestrated, for example with the creation of export processing zones (Ramo, 2004). China is also trying to promote its national product standards as global standards.
The Chinese economy has experienced astonishing growth in the last few decades that catapulted the country to become the world’s second largest economy. Since the transitioning process in 1978, China has become the world’s largest manufacturing hub and is increasingly playing an important and influential role in development and in the global economy (World Bank, 2017). However, even with all this, China’s per capita income is still only a fraction of that in advanced countries, thus it still remains a developing country (World Bank, 2017). Its market reforms are incomplete in such that according to its poverty standards, there were 55 million poor people in rural areas in 2015 (World Bank, 2017). The economic ascendance has brought further challenges, including high inequality, challenges to environmental sustainability, rapid urbanization and demographic pressures related to an ageing population and the internal migration of labour, all of which the China’s 13th five-year plan aims to address (World Bank, 2017; Lin, 2000: 1083-1084).
Moreover, despite the challenges, China has managed to still be the economic powerhouse of the 21st century, posing a serious threat to the U.S and European countries. China is becoming increasingly successful in subverting international trade rules, creating strong economic ties and gaining political clout by offering countries beneficial terms of trade, aid and investment (Brandt and Rawski, 2008). Countries have increasingly started to form alliances with China and look to them for diplomatic support. Generally, the Chinese transitioning process has been a success, regardless of some of its attempts that have not succeeded.
In conclusion, when reforms drastically change the distribution of wealth or power in society, the government must take a stand and address challenges from the less favoured. In transition, we analyse how one system transforms into another while understanding what institutions are needed to become market economies. Transition is not a simple process, however, it has brought significant changes in the lives of the citizens such that, it has raised the standard of living and caused demographic changes. Also, the initial situation and transition changes differ strongly among countries, hence not all countries who transitioned were able to make a success of the change like China did, leading up to their economic success up to date. However, General trends indicate that trade is associated positively with lower poverty and food insecurity in transition countries.
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