Econometrics

MacLaren Dudley

4/21/14

China’s Economic Emergence

Introduction

China and Japan both posses major economies that produce a high annual Gross Domestic Product. The two countries consistently hold the second and third highest GDP’s after the United States of America. Recently, China has overtaken Japan and is now producing the second highest GDP overall. An investigation into the history of the two countries’ forms of governments and economic strategies sheds light on how this change came to fruition. When World War II ended these two countries adopted polarizing government and economic plans. China became a communist nation that stifled capitalism leading to a decrease in industrialization and ultimately their GDP. Japan adopted a capitalistic form of government that promoted innovation and made Japan a leader in technology.

Initially after the war, China fell into a period of political and social unrest and its economy was hindered as a result. Eventually, the People’s Republic of China, led by Mao Zedong, was formed and the political field began to stabilize. (Morrison) Plans could now be implemented and efforts could be made to promote economic growth. Mao Zedong formed a command economy where the government controlled all aspects of production including pricing and allocation of resources. This total control expressed by the government diminished the ability for firms to price competitively and generate profits. Without profit maximizing incentives, Chinese firms elected to reduce investments in capital and experienced slow industrialization compared to other countries. This stagnation accounts for the slow economic growth experienced by China that lasted from after the war and continuing until 1980’s. (Morrison)

Following the death of Mao Zedong in 1978, the Chinese political and economic structures underwent a massive reformation. Previously focused on self-sustaining itself, the Chinese government allowed for an increase in exports...