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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Is China stronger economically in a market oriented economy compared to a centrally planned economy?

The transition of China from a planned economy to a more market-oriented economy began in 1978 with an economic reform. Prior to this reform, allocation of resources was purely controlled by the government. The centrally planned economy of China is separated into two sectors; rural and urban sector. In the rural sector, land was taken from the rich households and given to the poor and landless households (Knight & Sai, 2012). With the primary economic objective of urban industrialization, the government focused on heavy industries that focused on machinery. Being centrally controlled meant that state-owned enterprises had little autonomy (Knight & Sai, 2012). Hence, decisions about production such as what and where to produce were made by the government.

In 1978, the economic reform of China began its journey. Since then, the adoption of market-oriented reforms has lead to an incredible success. With this reform, China now has an average of 9% GDP growth per annum between the period of 1979 to 2008 (Yueh, 2010). One of the reform approaches that the Chinese government experimented with was the international trade and foreign investments. China created the Special Economic Zones (SEZs), this was initially in the southern region of the country in a province such as Guangdong (Yueh, 2010). This proved a success hence, China began to install further reforms such as the Free Trade Zones. This attracted many foreign investments into the country. In terms of GDP, in 1978, China's GDP was half of Russia's however, ten years later, China's GDP is twice of Russia's GDP (Qian, 2002). This comparison shows the amount of growth in China since becoming a market-oriented economy.

To continue with this essay, it is vital to understand that there is no pure separation in market economy and central economy. In theory, it is easy to define the separation between central and market economy. However, in reality there is no true separation of a central economy and market economy. This is because there will be a certain degree of intervention by the government. This is to protect the market from crashing. An example would be the Lloyds Bank merger with RBS to become Lloyds Banking Group, where about 46% of shares are state owned (Wilson, 2013). This is in the UK where it is known to be a free market economy. This signifies that there is no pure market economy and China's reputation of it being controlled comes from its communist roots. This essay will argue that China's economic future will be more sustainable if it moves towards a full market-oriented economy rather than a mixed economy.

There are various advantages of a market-oriented economy, one of these advantages is the improvement of lifestyle. Since the reform, China's economy has experienced exponential growth in terms of the economy. This can be observed through the purchasing power of the population. As China's economy is the second largest in the world, many luxury brands has focused their marketing efforts into the Chinese economy. Furthermore, brands such as Gucci and Bulgari has incorporated Chinese design into their products to suit the Chinese consumers' taste and preference. The Chinese population has now transform into a mobile population, where 72% of Chinese consumers tend to purchase luxury goods during their travels (Wanshiu et al., 2013). To further prove the point, 90% of Chinese students who are undergoing studies in United States have purchased luxury goods for themselves and family members (Brennan, 2012).

China's rapid economic growth for several decades has changed the perspective of how a person is branded as rich. In 1970s, a Chinese family was considered rich if it had an income of USD 1,200 per annum (Asian Times, 2002). However, the economic growth of the country has increase the wealth and income of the population. Urban residents' income per capita has doubled the income in 2001 from 1990 (Asian Times, 2002). Furthermore, the life expectancy of the Chinese population has also increased. In ancient China, it is not known to live past 70 years however now it is a growing number (Asian Times, 2002). This is due to the stability of social environment, improvement of living standards and medical care. This portrays the spending ability and the economic growth of the Chinese economy after the reform in 1978. Hence, the lifestyle of the Chinese population has improved significantly after the reform.

As well as improving of lifestyle, there has been a significant improvement in the legal system. The advancement in the economy requires an improvement of legal system. There was a need for a new and democratic legal system that protected the public. China's legal system began its journey as a socialist legal system. This was incorporated into the Chinese constitution in 1954. However, there were several various set back in this system. Hence, there was a meeting in 1978 to enhance the legal system which will incorporate the democratic rights of the people (Hua, 2015). The transformation of China from building a legal system to achieving the rule of law took 20 years. This transformed from the rule of man (the absence of rule of law and where a group of persons rule arbitrarily) into rule of law. In 2004, it was a turning point for the rule of law in China. This was when the government of China decided that the people have the rights of how the country should be run (Hua, 2015). It also incorporated human rights and focused the development of the people.

As a result, this introduced a new stage in China's legal system where it began to open up and breathe new life into it. This was the beginning of a new era for China. There has been an immense number of new legislations that will regulate the economic activity of China through the principle of rule of law (Hawes, 2010). One of the most significant legal development is the opening up to the private sector and the gradual eradication of distinctions between state and non-state developments. However, there was a lack of protection for privately owned land until 2007. This was when the Property Law 2007 was established to give equal protection to both public (state owned) and private property (Yueh, 2010). This gave value to the private housing market and opened up a new industry for the Chinese population to invest in. Furthermore, China has been a major supporter of human right treaties and have participated in many international human rights discussions (Hawes, 2010).

China has not only improved its economy and legal system but helped developed other nation's economy as well, this is because of the large influence it has on the world's economy. China is one of the largest manufacturers of exporters of the world economy. Its growth resulted in the development of many other countries as well. This was because they had strong trade links with many East Asian countries. This caused the East Asian countries to grow dependent on the Chinese economy. In 1978, the ‘open door' policy was part of the reform but did not fully go into motion until 1992. Since then, China has been a magnet for Foreign Direct Investments (FDI), this gave China the opportunity to develop its infrastructure and focus on their manufacturing capacity and exportations (Yueh, 2012, p.208). China has now transformed itself to from a major exporter and supplier of goods to a major consumer of goods. From 2008-2012, China's imports grew from 6.9% to 9.5% of the worlds total (Hou, 2014).

Being the world's second largest economy has made China one of the most important economies in the world. Countries such as Japan, Australia, South Korea, the Association of South-East Asian Nations, South Africa and Brazil has become dependent on China as China is the biggest export destination of these countries (Lan, 2010). This has enable these countries' economies to grow. The strength of the economic growth in China was essential in the recovery of the world's economy after the financial crisis in 2008. It was able to spur the world economies' growth as well. This shows the importance and strength that the Chinese economy possess over the world's economy. This is greatly beneficial to the countries that have trade links with China.

However, in current times there has been a slow down in the Chinese economy. China's president Xi Jinping has released the expected GDP growth over the next half decade to be around 6.5%, although this is a relatively high amount of growth, it is still one percentage point lower than previous estimates (Spiegel, 2015). As many countries rely on the strength of the Chinese economy, this may cause a slowdown in the world economy. This proves how vital the Chinese economy is to the world and a slight slow down may impact other nations significantly.

Having examined several advantages of market-oriented economy, this section will analyse the disadvantages that China has faced since becoming market-oriented such as the high pollution levels. Rapid industrial development and the pursue for economic growth has damage the environment of China. The pollution in China has potential to hurt its well built economy. There has been estimate that China's water and air pollution damages across the country is between 3% to 7.7% of GDP (Ho & Nielsen, 2007). This damages are expected to rise as economic growth will cause an increase of energy usage in the country. The main cause of air pollution in China is the burning of fossil fuels to be used as energy to aid in manufacturing. The burning of fossil fuels also produces high levels of greenhouse gases, these gases will cause the thinning of the ozone layer and have negative effects on the health of the Chinese population.

Many industrial production sectors such as the chemical and metals smelting and pressing sector produces 2,178 and 1,664 kilotons of sulphur dioxide (Ho & Nielsen, 2007). These are unhealthy levels to the population and many of the factories are based near cities. This may cause a huge impact to the economy of China as the value of national health damages is around an estimate of 137 billion Yuan per annum (Ho & Nielsen, 2007). To further prove the point on how pollution is damaging the Chinese population, there are a total of 304,282,645 cases of chest discomfort in hospitals in the year 1997 (Ho & Nielsen, 2007). Without knowing the exact figures of the cost of this hospital visits, one could assume that this will cost the Chinese population a significant amount of their income. This shows how the reform has created a negative effect on the environment in China.

Despite the continued worsening of the environmental state in China, there are solutions for the pollution that the reform has caused. As China is one of the largest coal production nations in the world, with its coal production around one third of world's total production (Bian et al., 2010), there is a high amount of damage to the environment caused by this extensive coal mining industry. There is an estimate of 315 million tons of coal mining waste per annum (Liu & Liu, 2010) and accounts for 40% of solid waste in China (Bian et al., 2010). To combat this problem, it involves the use of recycling, reusing and reducing to manage the waste by-products. A trial was carried out in the Suncun Coal mine where the Xinwen Coal Mining Company crushed the mining and mixed it with cement to fill the mining cavities (Bian et al., 2010), this is a form of reusing the waste products from the mining industry. It was confirmed that methods such as this could eventually reduce the waste of mining by 10% (Bian et al., 2010). Therefore, as China moves forward into a stronger economic powerhouse, there will be solutions for the pollution caused by the economy moving forward.

Although pollution is a major economic problem for the country, China also faces the rising levels of income inequality. In 1978, the Chinese government was a communist government, a centrally planned, low productivity and low inequality. The decades after the reform began the disparity between the rich and the poor. In the transition from centrally planned to market-oriented economy, the rapid economic growth resulted in a dramatic rise in economic inequality (Knight & Sai, 2012). The rise of income in urban areas was 5.8% and 5.4% per annum, this rapid rise of income had the ability to eradicate poverty but in contrary, it can cause a rising inequality which pushes the lower classes into poverty as well (Knight & Sai, 2012). Another reason for the rising inequality gap is that when the Chinese economy was centrally planned, the work unit was provided with welfares, lifetime employment (no risk of being made redundant), housing and pensions as wage for their services. However, as the economy moved to a more market-oriented economy, these privileges lessen and the wages has been increased by around 6% per annum (Knight & Sai, 2012).

Furthermore, as the Chinese manufacturing industry moved towards more machinery focused production methods, it made many low-skilled labourers redundant. Moreover, there has been plans by the Chinese government to make a reform on its coal industry. This is a move to restrict the excess production capacity as it will be pulled down the economy. This will make an estimate of 1.8 million people redundant, which is 17% of the total employees in the coal industry in China (Waugh, 2016). It is said that those who were made redundant had 3 to 6 times higher probability of falling into poverty (Knights & Sai, 2012). Therefore, this results in the widening of the income inequality gap.

As the top classes of the Chinese population become wealthier, there has been a widening gap between the rich and the poor. Most of the benefits of the economic growth in terms of wealth have been credited to those of higher class. However, the common workers in factories are still being paid the minimum wage (Lü, 2014). Some suggest that inequality is creating a large divide between those who can possess and does who can't while others argue that inequality is the inevitable result of a remarkable economic development (Lü, 2014). This may cause a disruption in the stability of the Chinese society and a resentment to the Chinese government as parts of the population may feel left out of the rapid economic growth.

This essay has analysed the advantages and disadvantage of China's decision to move towards a market-oriented economy. To conclude this essay, it is clear that China has issues to deal with but overall China has improved significantly after the reform. Therefore, the decision for China to move towards a market-oriented economy was a wise one. It brought many benefits to the country internally and other nations as well. However, will China be able to maintain its above average growth rate whilst combating the rising problem of pollution? This is a vital question that the Chinese government have to question and develop a solution for as well.

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