Transition of China to Market Economy

The transition to the market economy

The transition of China to the market economy has created embarrassment among the supporters of the so-called shock therapy, badly tested by other countries that have taken the same path. The process of transformation of the Chinese economy was in fact characterized by a gradual approach, with hesitations and slowness both in the liberalization of prices, in the formation of private property, and finally in the change in the administrative and legal framework. In the second half of the nineties, only half of the products were sold on the free market (less than a third of the means of production in industry): the liberalization of prices proceeded very slowly, even if it must be considered that at the end of the seventies all prices were controlled directly by the state.1995 still about 40% of industrial production. The gradual transition to market mechanisms, in addition to being caused by the liberalization limited to certain activities, was accentuated by the creation of privileged areas – with tax, customs or other incentives – autonomous in varying degrees from central rules and power: ‘ special economic zones’, ‘high technology development zones’,’ free zones’ or free trade zones, ‘state tourism zones’. Sectoral and territorial limitations have constituted areas of experimentation relatively isolated from the rest of the economy still regulated with administrative methods and unprepared for the impact of this experience. Slow were also the renewal or creation of administrative and legal structures compatible with the new model of functioning of the economy. And yet the transition to the ‘socialist market economy’ – a concept that from 1992 entered the official language – it proceeded confidently, expanding to an increasing number of sectors and geographical areas, and becoming an irreversible process.

According to DISEASESLEARNING, the most spectacular aspect of this process was the opening of China to the world economy. Synthetic indicators of this opening, such as the sum of exports and imports in relation to GDP and world trade, showed an impressive increase from the beginning of the reforms to the second half of the 1990s (the first indicator from 4 % to 23 %, from 1 % to 4 % the second). Exports in 1995 (nearly $ 150 billion) were seven times those of 1982, having increased over the period 1982 – 95 at an annual rate of 14%; imports also grew very fast, at a slightly lower rate than exports.

As already mentioned, the exchange rate policy has favored the expansion of exports, but it should not be forgotten that larger and more frequent devaluations have not had any effect in other countries that in the same years were going through the phase of transition from ‘ a managerial economy to that of the market and attempted to enter the world market. The reduction of tariff restrictions represented a further stimulus to the growth of exports, obtained also thanks to the participation in international agreements that allowed China to benefit widely from the most favored nation clause (imports remained, however, protected by customs duties and other non-tariff barriers, with selective exceptions regarding raw materials,

The causes of the surprising development of exports can be traced above all to the ‘open door policy’, i.e. to the set of measures, gradually introduced starting from 1978, aimed at decentralizing export activity with the creation of foreign trade companies independent of the central government, to create ‘special economic zones’, and to encourage the entry of foreign capital, particularly in the form of direct investments. In this way, China is not only a country that has seen its trade shares rapidly increase on the world market, but has also become one of the major attraction areas for international capital (second country in the world, after the United States, although concerns the inflow of direct investments, tab.); and, at the same time, it turned out to be a major capital exporter. It followed the same pattern of development – picturesquely referred to as the flight of wild geese – observed for other Asian Pacific countries within a process of regional integration and in the context of economic globalization: countries characterized by different stages of development move together as in a sort of run-up, in which the more advanced ones accentuate their specialization in products with a higher content of technology and human capital, letting the group’s new emerging countries expand exports of standardized and unskilled labor-intensive products. In this context of productive delocalization, capital mobility and changes in comparative advantages over time, China has been able to expand its potential for specialization in products with a high intensity of low-skilled labor. It, however, having been able to count on a large internal market, on the financial and technological contribution of foreign investments and on modern financial structures (in its special areas, in Hong Kong and in the neighboring financial centers), it has acquired the characteristics to assume leadership in the area of the Asian Pacific. The completion of ‘Greater China’, with the ‘return’ of Hong Kong in July 1997, accelerated that trend.

Although the economic policies adopted have generally been considered inconsistent, uncertain or contradictory, the overall opinion on them cannot ignore the extraordinary success achieved by the Chinese economy during the 1980s and 1990s. Three results, which appear to be as many firsts in the world, deserve, in particular, to be underlined again: first of all the expansion of the production system and the growth of the national product, with unprecedented intensity even for rapidly growing economies. development of the Asian Pacific countries; secondly, openness to the international economy, which has allowed China to conquer a leading role in trade and direct investments;

Certainly, alongside the undeniable results, open problems and serious difficulties remain. Suffice it to think, beyond the limits and fragility of macroeconomic policies, to the inadequacy of institutional changes, the persistence of forms of inefficiency and heavy operating losses, due to the preponderance of the state-owned enterprise sector, widespread corruption and environmental damage associated with rapid economic development.

Transition of China to Market Economy