History of Economic Growth and Reform
Since 1978 China has experienced very rapid GDP growth. Between 1978 and 2009 China has had an annual growth of over 8% for twenty five out of thirty two years, and from 1979 to 2006, China had an average real GDP growth of 9.7% annually. This rapid growth has increased the size of its economy by eleven times what it was. In that same time period China’s world ranking for total trade rose from 27th to 3rd place. The real GDP per capita in China had also increased eight fold within that time period. This has led to many changes within China like higher living standards and a long process of urbanization that are also having their own positive effects on economic growth.
The growth that China has experienced was due to a long process of incremental reforms starting in 1978 that have transitioned China from a planned economy to a market driven economy. These reforms came in two distinct phases. Phase one of the economic reforms lasted roughly from 1978 to 1992, and the second phase lasted from 1993 through the present. The first phase of economic reforms concerned itself more with decollectivizing agriculture, bringing in foreign investment, and allowing entrepreneurs to start businesses. These economic reforms were a great start but most industries still remained state owned and inefficient. The second phase of economic reforms focused heavily on privatization, getting rid of policies that hampered trade, and the breaking of many state owned monopolies. These are just short overviews of the reforms, and I will get more into the specific details of each phase of the reforms and how they affected economic growth in the next paragraphs.
The first phase of economic reforms that lasted from 1978 to 1992 introduced many changes to the Chinese economy. One of the most important policies of this phase of the economic reforms is the creation of the dual track system. The dual track system refers to “the coexistence of a traditional plan and a market channel for the allocation of a given good.” (Naughton, 91). The dual track system created a two price system for most goods, there was the planned price set by the state, and then there was a market price for that same good. In this system the planned price set by the state was typically lower than the market price. The dual track system however did not create a two ownership system, the big state owned enterprises still had monopolies on most industries and were assigned a compulsory plan by the planning committee for a specific output level. However thanks to the dual track system the state owned firms were able to produce above the level set by the planning committee and sell those goods on the market. This started to introduce all firms to the market and allowed for state firms to work with nonstate firms, which gave them valuable flexibility and started to adapt them to market processes. This was not sufficient to propel China towards a market economy but it was a great start towards making firms in China more efficient and better equipped to deal with market demand.
Another very important change during the first phase of economic reforms was the growth of township village enterprises (TVEs). TVEs played a very important role in transforming the Chinese economy from a planned economy towards a market economy. TVEs were still public, collectively owned enterprises, but they weren’t state run and were able to challenge and even break the monopolies held by the public state run enterprises. Overall TVEs allowed for more control by local and provincial governments and allowed them to operate and compete based on free market principles and not based on state planning. From 1978 to 2003, the number of TVEs grew by 20% annually, and by 2003 there were a total of 21.85 million TVEs that employed 135 million people. TVEs mainly showed up in rural areas and were used by farmers to set up collective farms. TVEs had a great effect on rural...
Cited: "China and US GDP Annual Average Growth Rate (1978-2009)." China US Focus. China –
United States Exchange Foundation, 09 June 2011
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