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Case Study

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Case Study

The logic behind the Chinese development strategy was that there was underproduction

in the country. The country had resources that could be used to ensure huge economic

development, but there was the lack of certain important environmental factors required to

facilitate production. The strategies aimed at encouraging increase in output by facilitating

competition and motivating people to produce more that they were producing. An example is

where the dual prices motivated the farmers to increase their output (Aksoy, 2004). The support

by the government and the fact that individual households could produce their own goods

motivated the citizens to engage in economic activities and realize their potential. Trade

strategies also encouraged competition with other countries, and this motivated the Chinese to

work harder. The dual prices and household responsibility strategies worked perfectly for the

agricultural sector but failed in government organizations. This is because, the state corporations

enjoy some protection and are not motivated to compete. Many of them receive subsidies from

the government when they perform poorly, and this is why they lack the motivation to work

harder and improve their performance.





The Chinese government had realized that the increasing population was not a resource to

the country anymore. The table below shows the rate of increase in population.

Year Total population Percentage increase in

population

1975 924.2 1.57

1980 987.0 1.19

1986 1,075.0 1.15

1988 1,110.2 1.58

1990 1,143.3 1.44

1991 1,158.2 1.30

1992 1,171.7 1.16

1993 1,185.1 1.15

1994 1,198.5 1.12

1995 1,211.2 1.05

2000 1,255.1 0.93

2010 1,348.0 0.70

2020 1,434.3 0.60

2030 1,500.6 0.39





Source: Adapted from Chinese Statistical Yearbook. World Bank, World Population Projections.

Having realized this, the Chinese government realized that one of the strategies of achieving

economic development is through control of ever increasing population.

The benefits of the strategies benefited the population because the standards of living had

increased by the year 1997. The table below summarizes the indicators of improved living

standards in China.

Indicator % value

Life Expectancy at Birth in years

69

Fertility rate (1995) 1.9

Adult Illiteracy Rate (males) 10%

Adult Illiteracy Rate (females) 27%

Labor Force in millions 709

Annual

Deforestationb

(1,000 km2)

8.8

Average Annual Deforestationb

(%, 1980-90)

0.7

Population with Safe Access to Water (%)

83





Malnutrition (% under age 5)

17

Source: Adapted from World Development Indicators, 1997.

The Chinese government had a duty to ensure that the government owned companies also

performed well. To achieve this, there was a need to ensure that the employees in the companies

are selected professionally without considering their political alliances. They should also be able

to benefit from the company depending on performance. This ensures that there is a direct

benefit by managing the companies to ensure good performance. The government should also

allow competition from other similar corporations (Schell, 2013). Doing this leaves the managers

with no other option other than manage the companies well and ensure that they perform well so

that they can get rewards and avoid being competed by other similar companies. Removal of

protection strategies is necessary to ensure that this is achieved. In cases where the corporations

fail to perform well completely, the Chinese government should have privatized the companies.

However, companies providing public goods should be supported by all means regardless of

their poor performance.

The strategies that were applied in the Chinese economy resulted in excess production of

goods and this created the need to export some of the products. The increase in exports in china

played a great role in the development of the Chinese economy. In the first place, the high

demand for the Chinese products motivated the Chinese traders and companies to engage in the

production of more goods so that they could meet the high demand. The effects of this were the





increased GDP of the Chinese economy (Qiao, 2000). The table below shows an increase in

exports from China as the strategies worked in favor of the local companies.

Year Share of exports

1985 1.1

1986 1.9

1987 3.1

1988 5.2

1989 9.4

1990 12.6

1991 16.8

1992 20.4

1993 25.8

1994 28.7

1995 31.5

1996 40.8

Source: Adapted from China, SSB; China, General Administration of Customs, China Customs Statistics, as reported in Barry Naughton, "China's Emergence and Prospects as a Trading Nation," Brookings Papers

on Economic Activity 2: 1996. p. 299.

The exports from china during the period can also be summarized in the table below

Item Value $(billions)





Clothing and Textiles 37.1

Machinery and Elect. Equip 35.3

Foodstuffs 11.6

Chemicals 8.9

Footwear 7.1

Mineral Fuels 5.9

Source: Adapted from Economist Intellegence Unit: Country Report: China, 3rd Quarter

1997

From the increased export, Chinese companies and traders got the required foreign

exchange that they needed in the purchase of capital goods that were required in the production.

The availability of the required inputs motivated the companies to produce more and sell it in the

international market. With the increased exports, competition in the external market made the

local Chinese companies learn from the competitors how to compete more effectively by

producing a variety of products as well as goods of high quality.

With time, the opening of the economy facilitated foreign direct investment in china. The

table below summarizes the change in foreign direct investment in China.





Year 1979

-198

3

198

4

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

Amou

nt in

billion

dollars

14.

5

3.1 4.7 7.3 8.4 10.

3

10.

1

10.

3

11.

6

19.

2

39.

0

44.

3

48.

1

54.

7

Source: Adapted from Chinese Statistical Yearbook.

Foreign direct investments in China have a great impact in the Chinese economy. In the

first place, the Chinese laborers secured jobs from the companies that had established themselves

in China (Bergsten, 2008). This benefited the economy because many people became employed,

and their living standards improved.

The foreign companies in china reduced imports for the country. This meant that the

trade imbalance in china was corrected, and the locals could access cheap locally made products.

Since the transport costs were lowered, the products were cheap, and this benefited the locals.

The foreign companies in china led to an increase in exports which was good for the Chinese

economy. This led to improved balance of payment as indicated in the table below

Year Overall balance of payment billion($)

1980 900

1982 5,674





1984 2030

1986 -7,034

1988 -3,802

1990 11,997

1991 13,272

1992 6401

1993 -11,609

1994 6,908

1995 1,618

1996 7,243

Source: Adapted from Balance of Payments Statistics Yearbook and International Finance Statistics Yearbook. 1980 information from World Bank, World Tables, 1991, as reported in China: The Great

Awakening, Harvard Case Study, number 9-794-019.

The foreign companies in China provided a basis of competition in China. The companies

competed with the local companies, and this motivated the need to manage costs and resources in

the companies. The competition led to efficiencies in the production process, and the quality of

products improved (Gertz, 2012). The locals benefited from the competition because the prices

of the products were low, and the quality remained high.

The foreign companies brought new technologies in china. The new technology

facilitated innovation and this led to increase in a variety of products produced from china. The

technology also lowered the costs of production, and the exports increased benefiting the





economy more (Bergsten, 2008). Technology also increased output in china which led to

improved GDP. Generally, the foreign direct investments played a big role in changing the

Chinese economy.

The Chinese economy faced great challenges in 1997, and some of them pose a great

threat to the country's economic growth. The first major challenge is inflation. The high inflation

means that the prices of the products in the country are very high. The citizens in china would

prefer buying from foreign sellers whose products are cheaper. The Chinese companies would

also find it difficult to export. This means that the companies will have to reduce their output,

and this has the effect of reducing the rate of economic growth. This is because reduced

production reduces the GDP in the country.

The failure in the financial systems is also another threat to Chinese economic

development. If the people doubt the stability of the banking system, they will withdraw their

savings from the banks and hold it in other forms (Lloyd, 2000). This will reduce the ability to

lend saved funds required for investment purposes. Reduced investment reduces economic

growth. Failure in the financial institutions has the effect of discouraging foreign investments in

china.

The fact that china is not a member of world trade organization means that the exports

from the country are limited unless the government engages in many bilateral trade agreements.

Reduced international trade will discourage production of products in china because of the





reduced market (Lloyd, 2000). Import of the raw materials also proves to be very difficult, and

the effect of this is reduced production. A reduction in the output reduces the GDP of a country

hence the economic development of the country.

Zhu has to change the strategies it engages in order to turnaround the economy and avoid

the current challenges. The first step is to control the financial sector to ensure that there is

responsible lending. The relevant bodies have a duty of monitoring the financial system using

economic theories to achieve stability in the systems. The use of monetary and fiscal policies

will work effectively to deal with inflation as well as regain the trust the people have on the

financial system. If this is achieved, then saving and further investments will be increased and

the economy will continue growing.

The other change in strategy required is making trade alliances with the developing

countries. Developed countries are not good customers for china because they have their own

companies producing their own goods. Partnering with developing countries will be of benefit

because the resources in these countries are yet to be exploited (Pei, 2006). As these countries

benefit from the technologies, expertise and products from china, the GDP will increase because

output will have grown. Now that china is not a member of world trade organization, there is a

need to be close to developing countries that will find it favorable to trade with china.

From the China case study, one observes that china has been successful in turning around

its economy because of the many economic policies that it implemented. The change was





however realized with many challenges that continue to be addressed up to date. For china to

remain relevant in the international market and sustain its economy, there is a need to change

strategies and partner with developing countries that need products from the country (Pei, 2006).

A partnership that will mutually benefit these countries will be the best strategy for now

considering that these countries are after partnering with countries that lead to a mutual benefit.

The Chinese government in that case has no reason to relax because much has to be done if the

Chinese economy has to continue growing as is expected. Globalization should be taken

advantage of, and bilateral trade agreements can work in achieving the objectives of the country.

References

Aksoy, M. A., & Beghin, J. C. (2004). Global Agricultural Trade and Developing Countries.

Washington: World Bank.

Bergsten, C. F. (2008). China's Rise: Challenges and Opportunities. Washington, D.C: Peterson

Institute for International Economics.





Gertz, B. (2012). The China threat how the People's Republic targets America. Washington, DC,

Regnery Pub.

Lloyd, P. J., & Zhang, X. (2000). China in the global economy. Cheltenham, UK: Edward Elgar.

Pei, M. (2006). China's trapped transition: The limits of developmental autocracy. Cambridge,

Mass. [u.a.: Harvard Univ. Press.

Schell, O., & Delury, J. (2013). Wealth and power: China's long march to the twentyfirst

century.

Qiao, L., & Wang, X. (2000). Unrestricted warfare: China's master plan to destroy America.

Panama City, Panama: Pan American Pub.

Vogel, E. F. (2011). Deng Xiaoping and the transformation of China. Cambridge, Mass:

Belknap.




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