Chinese brief economic history

China went into war with Japan from 1949-1952. This destroyed Chinese industry and mining as well as
agriculture. In 1951 China suffered from a huge famine and the economy went into an all-time low .In 1952, the
government aimed at returning the economy into normalcy. It adopted the Soviet economic ideology .It took
into state ownership virtually all industries, established cooperative and collectivism. A 5 year plan was
established in 1952 aimed at strengthening socialist system and state owned production systems. The death of
the Chinese economic chairman, Mao Zedong in 1979 was proceeded by a radical shift from socialism to market
based socialism. Since then, policies that were developed were based on this ideology. Good time began form
the 2nd 5 year plan dubbed The Great Leap. From then on, the Chinese development miracle began
Pragmatic and effective market-oriented reforms.
After World War 2, China adopted a Socialist, Egalitarian ideology. It took into government ownership about
80% of the industry. In the agricultural sector, China established cooperative farming system in which land
ownership was seized from individual to community ownership. This did not produce expected good results.
Mao Zedongs death was followed by a radical shift in ideology. The government then prescribed for market
oriented reforms. Market-oriented price reform and partial removal of restrictions that had prevented households
and enterprises from seeking advantage from price gaps and changing prices provided a major impetus for
accelerated growth. Although reform did not eliminate price distortions or barriers to the mobility of people and
goods, the beneficial consequences of allowing people to respond to price signals were enormous. Villagers
needed no precise calculation to see that they could raise their incomes by taking up nonfarm occupations.
Several hundred million recognized the opportunity and made the choice. China adapted as strategy known as
crossing the river by feeling stones, which encouraged local governments to undertake bold pilot experiments
(Demurger, 2001). By introducing market-oriented reforms in a gradual, experimental way and by providing
incentives for local governments, the country was able to discover workable transitional institutions at each
stage of development. One key feature of these reforms was their dual-track naturesupporting state owned
firms in old priority sectors while liberalizing and encouraging the development of private enterprises (Lin
2012). The economy was allowed to grow out of the plan until the administered material planning system
gradually withered. As a result of continuous and decentralized trial-by error exploration, institutional
arrangements evolved as new and different challenges needed resolution. Indeed, different localities often
adopted their own unique institutions tailored to their specific situations. Each state as allowed to act as a
different market structure. This provided for the need for localities specific based policies and intense
competition amongst them rewarded in the form of increased efficiency.

Source: Chinese economic review, 2012

The effect of the gradual market based policies can be seen by the incessant gradual decrease in the contribution
of the public sector to the Gross Industrial Output since 1978. Over this whole period, Chinese GNP rose,
implying that the private sector gained enormous dominance. Thus the gradual ideological shift from centralized
economy play a pivotal role to the Chinese miracle of development
The graph below shows the effect of market biased policies from a state dominated economy

Source: China Industry Statistical Yearbook, 2011

Balancing growth with social and macroeconomic stability.

The difficult economic situation at the start of reforms in 1978 made economic growth an urgent priority. Early
reform successes quickly transformed this priority into a national objective that was effectively used to mobilize
all quarters of societyindividuals and firms as well as local governmentsto focus their collective efforts on
economic development. The government employed a mix of fiscal, administrative, and employment policies to
maintain social stability during a period of rapid economic and structural change. This was no mean
achievement, given the need to employ an additional 9 million new entrants into the labor force each year while
also absorbing workers affected by policy shifts such as frictional unemployment, and occasional external
economic shocks (Asian Development Bank, 2012). Rapid growth and structural change also presented
macroeconomic challenges. The economy experienced occasional bouts of serious inflation, such as in the late
1980s and early 1990s. But macroeconomic stability was effectively restored through a combination of
traditional monetary and fiscal policies, as well as administrative.
High savings and investment
According to Solow (1957), the level of savings is a major determinant of long run growth. Many international
observer view high savings as successful experience supporting Chinas rapid growth. Historically, during the
process of industrialization, as the income grows, the savings rate (ratio of savings to GDP) tends to increase.
However, China did not just followed such a general trend, but appears to have much higher savings rate than
those in other countries. The table below shows the Chinese savings Rate as a percentage of GDP, in comparison
with the rest of the world over the years.
Chinese Savings Rate compared to the rest of the World
1960-1969
China
U.S
Japan
Korea
Singapore
Malaysia
UK
High Income
Middle Income
Low Income
World

19.9
35.5
8.7
-4
21.9
20
25.6
11.3
24.5

1970-1979
30.5
19.6
35.6
22.3
28.6
27.1
17.6
25.5
25.3
17.3
25.3

1980-1989
34.7
17.8
31.8
26.5
41.7
30.2
17.6
23.1
25.7
19.6
23.4

1990-1999
40.9
17
30.7
35.1
48.2
40.7
15.7
22.8
25.3
20.7
23.1

2000-2009
47.4
14
25.4
31.5
43,9
35.5
14.4
19.6
28.5
22.6
21.0

Average
47.4

20.2

Source: World Development Indicators, April 2013, World Bank.

As can be from the table, the average savings rate of the world is slightly higher than 20%, less than half of that
in China, which is averaged 47.4% over the past decade and overtakes that of Singapore. The tremendous
amount of savings strongly supports the investment which spurs the long run rapid growth without triggering
severe inflation.

Labour supply
There was plentiful supply of workers in China with a steady stream of rural-urban migrants in search of work.
This was due to the mechanization of agriculture leading to unemployment and under-employment in rural
areas and concurrent growth in industrial work in urban areas. Diego et al (1988) provided that more than
500,000 million people left the Chinese countryside in search of work over the last two decades. Voluntary
migration of the rural population has been accompanied by aggressive re-planning schemes in which rural
villages were demolished and new manufacturing settlements built at rapid pace for former agricultural families
to move in to. More so, the incessant increase in the population growth rate kick stated Chinese growth until
1979 when the government of China officially introduced the One Child Policy. China needed plenty of labour
supply in its early stages of development as it added to existing employment, an average of 9 million workers
into employment from the early 1960s to the early 1980s. The age distribution of China in the 1980s was
concentrated in the middle, meaning there was so much plenty of workforce which was really needed in the then
labour intensive industries and agricultural sector. In 1981, 65% of the population was aged 26-65 years. This
was one of Chinese growth advantage.
The Chinese population grew rapid from 1945 at an average rate of 1% per year since 1945 to 1995. The effect
of the Strict One Child Policy crept in in the late 1990s (as compared to the incentivized One Child Policy of
1979. However, the structural transformation of the population moving in to urban centers implied that more
labor was availed in the more activity urban centers, which was really necessary the economy of China. The
graph below show population structural shift from rural concentration to urban concentration

Chinese population concentration over time

Source: International Labour Organization, 2013

The proportion of rural based people fell from 90% to 50% from 1945 to 2009 and the trend continued and is
still continuing. Given that the population increased over time, and so did the work force, impliedly the urban
centers of industrial activity got more and more labour supply over the time. This was unambiguous one driving
force behind Chinese development.
Trade Liberalization
Economic reforms and trade and investment liberalization have helped transform China into a major trading
power. After the death of Mao Zedong in 1979, China drifted away from the command system which heavily
restricted trade. According to data provided by W.T.O (2013) since 1979, Chinese merchandise exports rose
from $14 billion in 1979 to $2.3 trillion in 2014, while merchandise imports grew from $18 billion to nearly
$2.0 trillion. Chinas rapidly growing trade flows have made it an increasingly important (and often the largest)
trading partner for many countries. China was the largest trading partner for 130 countries in 2013. From 1990
to 2014, the annual growth of Chinas merchandise exports and imports averaged 18.0% and 16.6%,
respectively. During the first nine months of 2015, Chinas exports and imports fell by1.9% and 15.3%,
respectively over the same period in 2014. The sharp drop in Chinas imports appears to have been caused in
part by declining commodities prices (such as oil and ores).
Chinas merchandise trade surplus grew sharply from 2004 to 2008, rising from $32 billion to $297 billion. That
surplus fell each year from 2009 to 2011, dropping to $158 billion. However, Chinas trade surplus has risen in
each of the past three years. That surplus was $380 billion in 2014 and $636 billion in 2015.
In 2009, China overtook Germany to become both the worlds largest merchandise exporter and the secondlargest merchandise importer (after the United States). In 2012, China overtook the United States as the worlds

largest merchandise trading economy (exports plus imports). Chinas share of global merchandise exports grew
from 3.8% to 12.4%. Until recently, merchandise trade surpluses, large-scale FDI inflows, and large purchases
of foreign currencies to maintain its exchange rate with the dollar and other currencies, were major contributors
to Chinas accumulation of foreign exchange reserves, which stood at $3.56 trillion as of August 2015, and were
the worlds largest reserves.
Chinas Trade Mechandise
($ billions)
Year

Exports

Imports

1979
13.7
15.7
1980
18.1
19.5
1985
27.3
42.5
1990
62.9
53.9
Source: World Trade Organization: 2013

Trade
Balance
-2.0
-1.4
-15.3
9.0

LESSONS FOR DEVELOPING COUNTRIES

A nation must create its own economic and political system guided by its national interests.
After the founding of the Peoples Republic of China in 1949, the country became a one-party state and initially
adopted communism but later changed to what they call socialism with Chinese characteristics. Chinas
economy has been defined as a social market economy, and does not fit into any one economic system.
Rather, it takes various parts of other systems and combines them to create a system that best serves its national
interests. The Chinese realized that they required stability to develop and therefore adopted a political system
that is a one party system with intra-party democracy. Without the political stability that came from having a
consistent government, the Chinese would not have been able to develop the way they have, and as quickly as
they have. Economically, the Chinese have adopted some capitalist policies in parts of the country even though
they are the biggest opponents of capitalism. Africa has tried to be communist, socialist, and capitalist over time
and has failed. Africans now need to be pragmatists. We must now do whatever is necessary to serve, further
and protect our national interests.
Policy discipline
China is one economy that has never negated its policies. Since 1949, China has been consistent on its policies
and it followed its policies as announced officially. Policies should be implemented as announced to gain
economic agency trust. When a policy failed, it was officially announced a failure and a new policy would be
announced and implemented truthfully. Most developing states, especially in Africa reneged more on their
policies, leading to loss of confidence and cooperation by the economic agents. Mankiw (2014) also argued that
the impact of dynamic time inconstancy are worse than implementing a policy up to its perceived failure as it
bears on the credibility of policy makers.

Trade liberalization
This is a very controversial suggestion. However China opened up its boarders and moved relatively more than
most countries in 1952. This saw mar

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