Can China Successfully Transition to a Consumption Based Economy

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‘CAN CHINA SUCCESSFULLY TRANSITION
TO A CONSUMPTION BASED ECONOMY?’

SIMON LOUIE
S42490852
ADVANCEDMASTER OF INTERNATIONAL STUDIES

A report submitted in partial fulfilment of the requirements of the degree of Master of International Studies in the School of Political Science and International Studies at The University of Queensland DATE 28/10/11

ABSTRACT
The Chinese economy is now the world’s second largest in terms of size, and is now the principal driver of the world economy. Nonetheless, its growth has been primarily driven by government led investment and exports, and this economic model is reaching its limits, as evidenced by increasingly inefficient investment and trade tensions with China’s partners. Furthermore, it has been the aim of the Chinese government for a number of years to shift the Chinese economy to a ‘consumption’ based model. In this report I will analyse the political-economic model of China, as well as the antecedent conditions necessary for a shift to a consumption led economy. In this report I identify a difference between an ‘architectural’ and ‘horticultural’ development episteme, with the former pertinent to centrally planned economies like China and the former Soviet Union, whilst the latter are more reminiscent of liberal-democratic states. I argue that whilst Taiwan, South Korea and Japan had strong central governments in their early periods of growth, their political-economic model had to undergo political reform to transition to a consumption based economy. I proceed from the epistemological viewpoint that there are universal traits to be found in all consumption led economies. The findings of this report are that the Chinese state has substantially neglected many of the social goods that act as disincentives to saving, by inadequate expenditure on education, health-care and a decent social safety net. Additionally, China’s aging population means that the younger generations will, in future, have to spend more resources looking after the elderly, rather than having money to spend on consumer goods. After comparing the Chinese economy with Taiwan, South Korea, and Japan, it can be seen that these three economies liberalized after essential infrastructure had been implemented. This has not been the case in China, rather the Chinese state is playing an ever increasing role in the Chinese economy. Hence my finding are that the ‘architectural’ development model of China cannot successfully transition to a consumption based economy in the absence of substantive political reform.

ACKNOWLEDGMENTS
In writing this report I am grateful for the guidance of Professor Stephen Bell who pointed out many of the errors in my drafts, and his assistance in editing my work.

TABLE OF CONTENTS
INTRODUCTION4
DATA AND TRENDS IN CHINESE CONSUMPTION9
THE CHINESE POLITICAL- ECONOMIC MODEL13
LITERATURE REVIEW16
RESEARCH APPROACH22
FINDINGS23
ANALYSIS& RECOMMENDATIONS29
CONCLUSION34
BIBLIOGRAPHY36

INTRODUCTION
In the more than thirty years since Deng Xiaoping’s ‘Reform and Opening Up’, the Chinese economy has grown at the rate of 7-10% per year, with a doubling every ten years (Lee 2007: 34), such that it is now the world’s second largest economy. Given the fragile state of the world economy, it is principally China’s growth which has prevented the world from falling into a ‘double dip’ recession. Nonetheless, despite its enormous gains, China as yet has been unable to transform its economy from a largely investment, and export focused economy to a more consumption based economy. China’s current model of growth has been described by Wen Jiabao as “unsustainable, unbalanced and has poor co-ordination” (Sainsbury 2011). This is demonstrated by the huge amount of bank lending to unprofitable State Owned Enterprises (SOEs) which has resulted in...
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