Economic Growth in China and its Integration with the Global Economy

Globalisation is the process that achieves global integration through the breakdown of manmade and natural barriers to the movement of labour, investment, finance, trade and technology. Globalisation allows for an international synthesis of economic growth. Economic growth is measured as a percentage increase of GDP (total output) and measures the increase of the total production of goods and services in an economy over a period of time.  Economic growth leads to not only just an increase in total production but also affects economic development. Economic development, measured through the United Nation’s Human Development Index (HDI), is the indicator of the economic wellbeing of a nation that refers to the health, educational and the environmental factors as well as the living standards of the nation.

China’s growth has increased substantially following the integration of its economy with the rest of the world. This process, known as globalisation, has occurred through the changes in policy that have affected the drivers of globalisation, specifically the two largest being trade and foreign direct investment (FDI). To understand the effects of globalisation on China’s economic growth, we must look at these drivers.

Trade has been the most significant driver for globalisation in China. China originally had a very restricted trade system under Mao Zedong in his 5-year central economic plans but under Deng Xiaoping, who opted for trade liberalisation, trade increments were seen. An increase in trade leads to an increase in GDP. This is because as trade increases and ceteris paribus is considered, net exports (X-M) should increase. This will lead to an increase in aggregate demand (as AD = C + I + G + (X-M)), which will lead to an increase in total output, or GDP (Fig 1.1) over the short to medium term.

These trade reforms saw China increasingly reduce tariffs, which would encourage imports and hence encourage trade, with rates being reduced from 35.3% on average down to 19.4% in 1995/6 (Bulmer 2012). China joined the World Trade Organisation (WTO) in 2001 as part of this trade liberalisation process, allowing for comparative advantage to occur, through specialisation in industry and increased competition from foreign companies. The agreement allowed China to be able to export goods and services into other countries with significantly reduced tariffs through multilateral agreements - which saw an increase in trade and net exports (X-M). As shown by Fig 1.5), China’s total exports increased exponentially after joining the WTO. Fig (1.9) shows China’s GDP growth rate from 2000 onwards. By comparing both figures, a correlation is seen between China’s exports and its GDP growth rate, with the years following 2001 seeing rises in GDP growth as well as exports. Hence, it can be said that trade, a driver of globalisation, has significantly increased China’s GDP growth rate.

Fig 1.5 – China’s Exports

China, under Deng Xiaoping, opted for an ‘open door policy’ for foreign direct investment (FDI). This policy was a part of its coastal development strategy, which aimed for development of its coastal regions. This development saw rapid industrialisation in these areas in an effort to make China seem more appealing for FDI, TNC’s as well as providing building blocks that would be necessary for future economic integration with the world.  ‘Special economic zones’, or SEZ’s, were developed to further encourage FDI in conjunction with the coastal development strategy, through deregulation economically and socially, providing more inclusions for foreign companies in certain coastal cities/regions – namely cities such as Shenzhen, that were near large trading partners such as Taiwan and Hong Kong as well as being near major ports, having high participation rates and low wages, and supportive of new technologies, were labelled as such zones. The inclusions that were provided were of tax incentives and economic policies that supported market-oriented practices such as capitalist production methods and increased spending in healthcare, social welfare and environmental sustainability in these areas. Rapid industrialisation ensued following this strategy “Assisted by the SEZ’s foreign investment has increased from near zero levels in 1978, to $3.5 billion in 1990 and to over $60 billion today” (Leading Edge, 2011, p.3).

FDI is a driver for globalisation and an increase in FDI, if ceteris paribus is considered, leads to an increase in GDP. This is because, FDI allows for more production facilities to be built, which not only needs labour for the construction of buildings and facilities but labour later onwards in the production process. An increased use of labour will lead to an increase in overall production of a good or service. Hence, as FDI increases, so too will aggregate supply (Fig 1.2), as when there is an increase in the amount of goods and services supplied there will be an increase in the production possibility frontier (Fig 1.3). As aggregate supply increases, there will be an increase in GDP, leading to long term growth. This can be seen in Shenzhen, an SEZ (from 1980 onwards), which, when the coastal development strategy was in effect and the SEZ policy began, saw an increase in GDP of over 40%,  during 1981-1993, which was significantly higher than the average increase of GDP of 9.8% for China (Wei Ge, 1999, p.68). Hence, it can be seen that an increase in globalisation in China, through FDI, allows for an increase in China’s economic growth rate.

Globalisation has not just been completely positive for China. Although China has benefited greatly from increased global integration, it has removed many protective barriers that would’ve shielded its economy in times of international economic turmoil such as the GFC in 2008. As shown in (Fig 1.9) China’s annual GDP growth rate fell from a high of over 12% down to near 6% following the 2008 GFC. Due to the understanding that globalisation achieves an international synthesis of total output, this reduction in annual GDP growth rate, would not have occurred if globalisation did not proliferate in China. Hence, it can be said that China’s integration with the world economy has allowed integration with the international business cycle and hence has allowed it to be more susceptible to changes that occur in other countries, economically.

Fig 1.9 – China’s Annual GDP Growth Rate

Globalisation has increased China’s GDP growth rate significantly through increases in the drivers of globalisation, namely being FDI and trade, with these increases in economic growth positively impacting the economic development of China by increasing the GNI/Capita PPP (Purchasing Power Parity) of the nation, as higher incomes are earned and more people are employed, which in turn raises the HDI of nation. This is because HDI is measured through three main aspects: Life expectancy at birth, Educational attainment and GNI/Capita PPP. HDI is a tool used to measure the economic development of a nation. Therefore, an increase in economic growth can be said to lead to an increase in economic development and increases in global integration which raises total production, will lead to an increase in economic development. Hence, all the aforementioned drivers of globalisation have contributed to an increase in economic development. This can be seen in (Fig 2.1) where the GNI/Capita PPP increases similarly to the growth in GDP as shown in (Fig 2.2). This suggests that increase in GDP will lead to increases in GNI/Capita PPP. Further strategies have been implemented by the Chinese Government through strategies to raise this quality of life indicator.

Fig 2.1 – GNI/Capita PPP China in ($US)

Fig 2.2 – China’s Real GDP in ($Billion US) The agricultural sector saw reforms, where originally all food produced was sent to the government who had the responsibility of distribution, with the government setting the prices/quotas and made it illegal to produce any more. This prevented growth and increases in productivity. However some of the strategies under Deng Xiaoping were the ‘Household Responsibility System’ and the Dual Track Method, where farmers still had to provide quotas to the government but any excess stock was allowed to be bought and sold. The households were also given land, divided from the previous communes, which encouraged competition and subsequently increased productivity, with rises in TVE’s (Town and Village Enterprises). This move to a more market-based system saw significant gains in productivity and growth in the agricultural sector. It meant that families were able to produce more goods and subsequently earn higher incomes. This means higher GNI/Capita PPP, which as an indicator for the HDI, would lead to better economic development. This is evident in (Fig 2.1) where the GNI/Capita PPP of China increases exponentially following 1983 when the reforms occurred. Higher incomes also meant that there was more disposable income available to families, so there was a better possibility for children to be sent to school and when necessary, medicine and doctors could be paid for. Also higher incomes would allow families to eat more/have larger access to food. This in turn would increase life expectancy (Fig 2.3), which would increase the HDI of China and hence, better economic development. Fig 2.3 – Life Expectancy at Birth China’s trade liberalisation strategy has also greatly affected the economic development in the nation. This is because as trade agreements are made, notably free trade agreements made through the WTO post-2001, imports into the country should become cheaper. This is because there is a removal of tariffs, which are taxes placed upon imports, which would lower the price whilst also increasing competition into the market. Lower prices, means that more people are able to purchase more goods and services, raising the standard of living in China. However, increased free trade means an increase in competition which could possibly close down certain industries in China as they do not have a comparative advantage. China’s coastal development strategy was not just aimed at encouraging FDI by making coastal regions more appealing to foreign companies, but also greatly affected the economic development of the area. This is because the development strategy saw significant efforts of investment into health, education and infrastructure within these areas. Also as FDI increased within these regions and as more job opportunities were available, people migrated from rural areas to these cities. The jobs within these cities also provided higher incomes with neither space nor necessity for agriculture but more employment opportunities that were skewed towards tertiary and secondary industries. However, the coastal development strategy has not been completely positive. This is because although in the coastal regions there was increased industrialisation, other rural inland areas, were neglected of this treatment. The new jobs provided also skewed the distribution of income in the nation as well as shown by (Fig 2.4), with the GINI Index showing that China’s inequality has worsened over the years, suggesting that its economic development strategies have not been completely benefiting of all individuals in China.  Fig 2.4 – China’s GINI Index Comparison Fig 2.4 – China’s GINI Index Comparison    This increased industrialisation has also lead to an increase in environmental degradation, with CO2 emissions increasing due to new factories being built and an increased reliance on new technologies which require large amounts of electricity – which is produced through the burning of fossil fuels. (Fig 2.7) shows this increased environmental damage with CO2 emissions per capita increasing substantially following 1983 (during agricultural reforms) and 2001 when China joined the WTO. Fig 2.7. - China's Co2 Emissions Per Capita China’s distribution of labour changed over the course of its global integration strategies. This was due, not only to the adoption of new technologies – which have reduced the necessity of manual labour and reduced overall production costs – but also due to the international division of labour. Due to the tax incentives and heavy deregulation that occurred in China’s coastal areas, as well as China’s low labour costs and limited restrictions over the environment, multiple industries, mainly manufacturing, had moved from areas where labour costs were more expensive and environmental restrictions limited manufacturing methods and production – such as the U.S.A. This not only saw an increase in jobs that were now available in coastal cities but also saw opportunities for employment that was not in the agricultural industry – there was now no need for so many people to produce food. Specialisation has allowed for the distribution of labour within China to change significantly. In 1995, “52% worked in primary industries (as against 70% in 1978), 22% worked in manufacturing (as against 17% in 1978), 25% worked in tertiary industries (as against 10% in 1978)” (Bulmer, 2012). However, although the GNI/Capita PPP has increased due to this shift (Fig 2.1), inequality has arisen with the lowest 10% having less share of national wealth (Fig 2.5) in comparison with the top 10% whom have increased their wealth (Fig 2.6). Fig 2.5 Income Distribution (Lowest 10%)    Fig 2.6 - Income Distribution (Highest 10%) Globalisation has allowed for significant increases in GDP in China but global integration has made it more susceptible to international economic turmoils. Strategies that have increased globalisation – and increased GDP – have increased economic development in China in conjunction with other policies and strategies; however, economic development strategies have not been completely beneficial with inequality, environmental degradation and poverty increasing in China, although GNI/Capita PPP has increased significantly. If you have a burning question, or would like to featured in some way in the "Ask them from me" segment, email me at: cc3493@gmail.com. If you do not want to be featured in the "Ask them from me" featured post, please let me know in the email :) Visit Particular Interest for more content like this! Previous Essay All Essays Next Essay