China encompasses a large geographic area with a wide range of resources. The rapid shift to a market economy in the last thirty years has transformed it into an economic powerhouse. This growth was achieved and is perpetuated by enormous government support. The result is a transformation of much of Chinese society as well as its role in international affairs. China's economic power goes far beyond the marketplace as wields its ability to affect the consumption of raw materials and finished goods and services. Despite these changes, certain patterns of behavior, customs, and attitude persist, particularly in rural areas. This growth has not been without costs in terms of pollution, health risks, and government corruption. The shift from state owned to private industry has led to a great deal of freedom with little actual oversight on the part of the government.
China is a large country that covers 3000 miles from east to west and 2500 miles from north to south (Figure 35). The nation contains a diversity of landscapes and a wide range of physical features. In ancient times, its natural barriers isolated China from the rest of world: the Pacific to the east, the Talkimakan desert and 14,000 foot plateau of Tibet and Himalayas to the southwest and to the Gobi desert and Mongolian plateau to the north. Two major river systems traverse the country from east to west: the Huang He (Yellow) in the north and the Yangtze in central China. The first areas settled were along these two river systems (Figure 18).
Mountain ranges and deserts cover two-thirds of China's land mass. 90% of the remaining area is the plain between the two rivers (Figure 35) and in the past flooding was a perennial problem. The northeastern portion of country is forested mountains surrounding broad fertile plains where natural resources include timber, petroleum, coal and iron (Figure 32) . North China, between the Mongolian steppes and Yangtze River, has terraced land that is highly cultivated. The largest and most populous region is East Central China, which includes the Yangtze valley and west from the Yellow sea to the Tibetan plateau.
China has abundant natural resources but the geometric growth of consumption over the last thirty years has begun to deplete everything from coal to timber. Throughout China's several millennia history, the ability to feed the population has been linked to political stability. The recent economic boom has led to the depletion of soil and water resources. Water usage has quintupled in the last 60 years, and the discrepancy between the number of people (China contains 20% of the world's population) and water supply (only 7%) is a grave concern. Grain is also a pressing issue. For the last thirty years, farmers have been encouraged to grow surplus crops and sell whatever they are able to beyond the quotas set by the government. The result has been increased cultivation that is rapidly depleting the soil.
Traditional Chinese sensibilities towards nature and land are different from those in other parts of the world. Nature is to be dominated and controlled. Animals and plants exist as material commodities to be used as medicine or food. This understanding differs from Western views where they are considered essential pieces of a natural order.
After the death of Mao Zedong in 1976, less doctrinaire leaders took over the mantle of the Communist Party in China and departed from his rigid stance against capitalism. The pace of growth since that time has been unprecedented in the history of the world, with most years witnessing double digit increases. There are still many state owned enterprises and the government is directly involved in most aspects of the economy. Private industry increasingly characterizes not only the Chinese economy but has positioned it as a powerhouse, second only to the United States. At this writing, China has become the dominant global producer of steel, coke, aluminum, cement, chemicals, leather and paper.
China now produces and exports many goods around the world that were once made in the West. As much as the country produces, it also has become an incredible consumer of crucial commodities such as coal and oil. Continued growth will only increase the consumption of these goods.
One sector that has grown enormously is agriculture. During Mao's time, collective farming and other state run endeavors led to severe shortages and a frequent inability to feed the country's massive population. After his death, Party leaders decided to return to household farming with state set quotas and permission to sell any overage. Food production rose 50% between 1978 and 1984. By 1983, all farms in the country were functioning as private enterprises. This change not only increased wealth for some in rural areas, but also freed workers from the land to relocate to urban areas to supply much needed factory labor. This migration and the increased agricultural yield to feed the growing urban population are two essential elements of the shift to an industrial economy. Not only did productivity improve but the number of crops planted each year increased to meet burgeoning demand. Land is, however, still owned by the state so it cannot be used as collateral for loans or other expansion. Local Party leaders lease the land and derive much of their power from control over this essential commodity.
Several factors have contributed to this unprecedented growth. At the most basic, is the central government, which in China is synonymous with the Communist Party. The Party lifted restrictions on market activity and allowed private ownership to co-exist with state ownership. It also helped to create a highly hospitable environment for economic growth in areas that include access to private banking, few environmental restrictions, and ease of foreign investment. Massive transformation of China's economy resulted only with a shift in attitude towards science, education and technology. By insisting on an ideological approach to economy, Mao had alienated many and starved even more. On principle, he rejected any practice that was tainted with the bourgeois, capitalist economies of the West. His successors realized the essential need to be practical.
Mao had also isolated his country. Upon his death, there was an appreciation of the need to generate trading and investment partners. His refusal to do anything that capitalists did had severely hampered the country's ability to be self-sufficient. His successors were less idealistic and in this practicality have transformed the economy. They have also created a new economic and political entity in which the openness of the former is matched by repression in the latter. They have managed to achieve their goals of sustained double digit growth.
Over the last decade, the government has provided generous state financing to private industry and tax incentives to support industrialization on a massive scale. Another factor in China's economic boom is technological advancement and strong government support to create infrastructure that will enable growth, such as an education system that caters to the elite. The Chinese also have proven excellent at taking foreign approaches and adapting them to domestic circumstances.
Certainly none of this enormous growth could have occurred without a favorable banking climate both in terms of access to capital and a legal structure that enabled manufacturers to benefit from easy and inexpensive sources of funding. The government currently allows Chinese banks to pay ‘negative real interest’ on deposits and they are able to lend to state owned and private firms quite cheaply. Many of these companies also get free land leased from the government and pay negligible dividends leaving money to reinvest in development and expansion.
Much of this investment comes from foreign sources. New ideas arrive from overseas as well. The government sees no inconsistency with open economic opportunities and highly controlled political ones, and the Party represses those forces for political change while embracing the sources of these challenges to its hegemony. Some observers express concern about the extent to which Chinese companies need to Westernize to compete in the global market, particularly in areas of marketing and innovation. The Chinese have retained many aspects of their own business culture, especially those that allows employees to feel rooted in the company. Domestic companies have been very flexible and open to foreigners themselves doing business in China. The fluid nature of this acceptance has bolstered responsiveness to a range of external conditions as the Chinese use their understanding of their own society and culture to expand business opportunities.
Foreign personnel represent just one segment of the very fluid labor market that has enabled the nation's extreme growth. The availability of a mobile work force is the hall-mark of an industrializing society and internal migration is as essential as the international movement of human capital. Improved productivity in the agricultural sector over the last thirty years has led to dislocation and caused many millions of Chinese to migrate to urban areas. As is often the case in these circumstances, not all of this movement has been positive or the result of free choice. Despite laws against child labor, many children from impoverished areas are tricked or kidnapped by employment agencies. This problem has increased in recent years because worker shortages, inflation and increased production costs has led to a desire to cut production costs. Children under 16 are often paid far less than the national average of 64 cents per hour. Many factory owners work hard to deceive government inspectors. Some children are placed in harms' way by their parents, who need their wages and are either unaware of or indifferent to the problems they face. A pool of temporary workers that are used to adapt to the ebb and flow of market prod ction is common in an industrial society. This secondary labor market is usually comprised of those whose limited skills make it impossible for them to maintain employment or protest unfair or dangerous conditions.
In addition to these problems, the general state of work in China is one of long hours in order to feed the needs of the rapidly growing economy. The recent completion of an airline terminal in Beijing was accomplished below projected costs and time because tens of thousands of workers resided on the site and production commenced 24 hours a day, seven days a week. One can question the real cost of achieving this efficiency and economy of scale, or as one observer noted, "it must have been what it was like when they built the pyramids."
The Communist Party not only created the conditions for the rapid rise of the Chinese economy but also supports its continued expansion in a variety of ways. Despite individual gains and a rising middle class, the authority of the government in Beijing that uses its extraordinary might to create an environment where this sort of growth is possible, is not diminished. Over the last thirty years, local Party officials provided the stability necessary for economic expansion in exchange for relative autonomy from the Party bosses in Beijing. Problems now arise as these national leaders attempt to enact systemic change in an endeavor over which they do not have full control of all component parts.
This continued growth occurs both because of what the government does and what it does not do. China now willingly partners with ideological and historic enemies, such as Taiwan and Japan, because of the potential of their markets. The Communist Party allocates limited resources, such as petroleum, to domestic industries and pursues a foreign policy that supports unsavory governments, such as Sudan, to ensure access to oil, the demand for which is only increasing.
One area where the government exerts direct government control is in banking and the money supply. For example, it intervenes in currency markets to slow the rise of the yuan and preserve the competitiveness of Chinese goods in foreign markets. In recent months, the Party has made concrete efforts to curb inflation (at an 11 year high of 7.1% in January 2008) and prevent the economy from growing too quickly. Party leaders have frozen prices on energy and some food items. They also tightened lending rules to hold down prices on the stock exchange and ordered banks to set aside more of their deposits as reserves three times in 2008. The overall impact is favoritism towards Chinese industry and restriction of foreign competition in the domestic market.
The central Party leadership in Beijing maintains a broad perspective. As is the case in most country, political leaders promote policies that serve the entire nation despite having a negative impact on one segment of society. Something such as the Three Gorges Dam project on the Yangtze river (Figure 35) has cost billions and dislocated millions but will serve as a source of abundant and clean energy by creating hydropower from one of the nation's largest rivers.
Many government projects reflect this seeming ‘utilitarianism.’ Devastation from the May 12, 2008 earthquake in Chengdu revealed an inconsistent application of building codes, as some structures survived the calamity and others collapsed. Construction in this area, long recognized as vulnerable to earthquakes did not prevent the government from pushing major infrastructure and military projects there. In 1960, the Party began to fortify the region outside of Chengdu (Figure 31) because the relatively remote area was less vulnerable to aerial assault.
Even when the government does pass laws to prevent or eliminate problems, officials often fail to enforce these measures. The Party leadership sets targets for energy efficiency as well as improving air and water quality, but most go unmet. The reality is that the government will not use tax policies and market-oriented incentives for conservation that have worked in the West. China has indeed capitalized on the application of these measures in other countries to assume market share in many industries not restricted by environmental laws in domestic production. This ‘legislative neglect’ is true with anti-piracy laws as well. The problem is far more extensive than bootlegged DVDS. Many US companies are reluctant to sell sophisticated products to China, fearing that their technology will be ‘borrowed,’ copied, produced more cheaply and eventually used to undercut them in various markets.
There have been many repercussions from this rapid and frequently unfettered growth. The impact on the environment, health, politics, and culture has been profound. Upward mobility and economic gain for some has led to wider divisions by class and location. As China creates its unique hybrid of an open economic system and closed political one, these increasing tensions shape future directions.
Much good has come from China's economic expansion as life is indeed easier and better for some of the nation's 1.3 billion residents. Urban expansion has pervaded the nation as cities are the site of manufacturing. More than 150 million rural dwellers have left the countryside to find employment in the new and growing cities. Market reforms have led to a rise in consumerism, including a taste for Western culture and entertainment. The shortening of the work week from 48 to 40 hours has created some leisure time. Life in the cities is different from that in the country side where 800 million people, 60% of China's population, reside. The rate of economic growth in these areas is far less than in the cities. Although farmers have returned to a household economy and are able to sell whatever they grow beyond government quotas, their lives are still very much dictated by local party leadership, which owns and controls the land. It cannot be used as collateral to expand or diversify as is the common pattern of industrializing nations.
The most negative and obvious impact of this rapid economic transformation has been on the environment resulting in serious pollution and health dangers. There has been the destruction of what was once China's healthy and balanced ecosystem as the country is literally choking on its own success. 40% of mammals and 70% of indigenous plant species are endangered. The amount of arable land has declined because of both overproduction and urban growth. Coal, which supplies ¾ of the country's energy needs (Figure 32) , is burned in old, dirty factories as a larger proportion of fuel resources are used for industry than private consumption. As a result, only one percent of the country's 560 million urban dwellers have access to air that is considered safe.
The government also allows dangerous levels of carcinogenic materials. For example, in the US, diesel fuel can only contain 15 parts sulfur per million. In China, the number is 130 times as much, or 2000 parts per million. Trucks, the workhorses of the new industrial expansion, spew their exhaust throughout the country. Although the government sets weight limits for loads, most truckers routinely ignore these limits knowing that heavier loads lead to greater profits. Heavier loads also damage roads. The government keeps the price of diesel fuel artificially low by forbidding state owned oil companies from increasing prices. The result is that trucks are more cost effective than trains which would be more energy efficient and less dangerous to the environment.
China suffers from severe water shortages caused by both shrinking rivers and diminishing glaciers. 500 million people in the country lack access to safe drinking water. Not only is the water supply dropping but it is increasingly contaminated by sewage, industrial waste, and agricultural run-off that includes pesticides. Fish farms, which provide 70% of the world's fish, discharge waste that further pollutes the water supply. To cope with these toxic wastes, illegal veterinary drugs and pesticides are put into fish feed which keeps stocks alive yet leave poisonous and carcinogenic residue. The result is that cancer has become the leading cause of death in China.
The Party takes few steps to prevent these problems. Most buildings do not have thermal insulation and therefore require twice as much energy as insulated buildings do to heat and cool. Even when the government does set standards, they are ignored. 95% of new buildings do not meet China's own codes for energy efficiency. Similarly, new standards of fuel efficiency have been set but they are not enforced for new trucks or applicable to older ones.
The real problem is the extent to which the central government can mandate compliance. Part of the growth over the last thirty years resulted from allowing local and regional Party members autonomy. They now ignore Beijing's attempts at regulation which they see as an attempt to lessen their power. The Chinese people also like the benefits of these economic gains, among which are spoils for well connected officials. There is little outcry for an overhaul of the political system and such demands would likely be met with repression or imprisonment. Political change is the only path to addressing the problem, yet China has no infrastructure to create and/or administer solutions. There is no Chinese equivalent of the US Environmental Protection Agency or Department of Energy.
There have been some expressions of concern and protests, not from the poor or peasantry but from the well organized urban middle class. For example in May 2008, residents took to street of Chengdu, the provincial capital of Sichuan (Figure 31) to protest a multibillion dollar petrochemical plan backed by China's leading state owned oil company. Despite official prohibition of such activities, civic movements have gained power through the use of the internet and cell phone text messaging. Concern was expressed over the failure of the government to conduct proper environmental reviews of the project which could increase pollution and health hazards. This was an attempt to hold the government to the safety parameters it has put in place.
There is a profound difference between China and Western nations in terms of the timing of these protests. The United States and Western European nations industrialized first and then dealt with the hazardous repercussions of their growth. As part of today's global economy, even a repressive regime such as the Chinese have to give the appearance of tackling environmental problems. But overall, whoever is making the choices in China is favoring growth over protection and safety.
Even considering the growth and power of the Chinese economy, there are limits to the extent which Beijing can exert complete control either domestically or internationally. Under the Communist system, the Party could make guarantees. The rapid transformation to a market economy, no matter how imperfect or incomplete, has undercut a lot of these assurances. As the cyclic nature of the market encroaches, state promises of employment, housing, health care and education have been eroded. The economy is showing signs of stress because inflation is on the rise and the trade surplus with the West is declining. Furthermore, because Beijing underwrites growth via subsidies, depositors and taxpayers are subsidizing the very industries that are harming them.
There is no shortage of pressure from the Western nations who urge Beijing to ease trade barriers and currency controls. Likewise, there is strong international pressure to ensure the safety of products such as Heparin, a blood thinning drug that has been associated with 19 deaths. Here the seeming hypocrisy of ‘ignored legislation’ infiltrates China's standing in world affairs. The government acknowledges that this will be difficult given that so much of the complex supply chain is unregulated from thousands of small workshops that derive one of the key components of Heparin from pig intestines.
China leaves many areas of its economy unregulated, particularly the stock market. The government ignores charges of insider trading and stock price manipulation. The Chinese have a certain comfort level with moderate corruption in business that is alien to Western sensibilities. Beijing did respond to market volatility in second half of 2007 largely because companies were placing profits in unstable markets by making it more difficult for large blocks of shares to come to market.
China is also subject to the vagaries of the global market. Domestic price controls may limit the cost of many essential items but the falling US dollar is still driving up global commodity prices and lessening the demand for Chinese imports. The Chinese economy is also limited by its own tendencies and predilections. Many foreign observers note a limited supply of local managerial talent, essential for the growth of large corporations. Also the educational system tends to promote technology over innovation and/or institution building. China needs human resources but the traditional Chinese approach involves trusting family and friends rather than outsiders. China's economy is on an expansive path that necessitates home grown managers or the control of corporate direction will fall to foreigners and/or multinational companies.
The Communist Party's complete control is diminished on several fronts. The repressive nature of the regime is based on the ability to control information but technology makes that increasingly difficult. The large problem is the decreasing ability of the Party to deliver goods and services to the people. Its power has been lessened by corruption, the widening wealth gap, and big layoffs at state owned companies. For almost sixty years, Beijing had enforced social control and political discipline via the work unit as state employers provided salary, housing and education but the rise of private industry undercuts this capacity.
Despite these limitations and problems, there is no doubt of the power of the Chinese economy and its ability to affect the global landscape, well beyond the economic sector. The Chinese support and gain access to third world nations by buying their raw materials and selling in their markets. One needs to look no further than the problem of Darfur to see the power of the Chinese to influence behavior. As long as Sudan's government has the unconditional support of the Chinese, who are working closely to develop the African nation's vast oil reserves, all of the outrage in the West is for naught. Millions of dollars in arms sales to the government in Khartoum further confirms China's influence and interest.
It appears as if China is intent to do all that is necessary to support its economic growth. If coddling dictators, despoiling poor countries and undermining democratic efforts to get the oil, tin, copper, coal and other resources necessary to achieve its goals, China will do so. America is losing its influence over the nations of Latin America and Africa to the Chinese who have provided the one incentive America's good intentions and corporate culture could not — true economic growth.
Beijing recognizes its power as well as the desire of other countries to do business in China and increasingly passes legislation favorable to its own economic interests. For example, the recent effort of Microsoft to acquire Yahoo was affected when the Chinese passed an anti-monopoly law that extends the nation's economic influence far beyond its borders. This law gives the Chinese regulators the authority to examine foreign mergers when they involve acquisition of Chinese companies or foreign corporations investing in Chinese companies. As a result, a third sphere of regulatory influence, in addition to the United States and the European Union, has been established.
China imposes steep tariffs on American technology that could be used to clean its air and water and improve its energy efficiency. In addition, it places import duties on steel, paper and other goods. China exerts direct influence on the Asian markets with such concrete measures as shipping, navigation, power plants and ports. The ability of the Chinese to sell arms to neighboring nations affects the balance of power in the region as well.
The placement of the Olympics in China this summer speaks to the use of economic might to achieve political gain and global acceptance. The Chinese seem to worry very little about public relations. The strength of their economy is what fuels their power, in spite of what the West thinks. As long as they are the only one of a handful of countries that can finance the increasing debt of the United States, our protestations seem hollow every time we let them buy our treasury notes. Indeed the Chinese question the American economic model in light of its own. Only one of the two countries is in recession.
China is still affected by global economic developments. The weakening US dollar has decreased exports. Rising commodities prices have increased the cost of imports and diminished domestic reserves. But these are just growing pains. China is in its economic adolescence and its power and authority will only grow in the years ahead.
1. In general, how do economic and political systems reinforce one another? How have these forces generated the amazing transformation of China in the last thirty years?
2. How does China's role as both a consumer and producer of commodities affect its world standing?
3. Did Mao's ideology fail the Chinese people?
4. What impact have foreigners had in China's economy? What limitations exist on this influence?
5. The standard phrase is that ‘politics makes for strange bedfellows.’ How does economics create this ‘marriage of convenience’ as well in China?
6. Has Chinese economic growth been worth the cost?
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