Economic Reform in China

Economic Reform in China

1. Introduction

When PRC was found in 1949, Chinese political leaders had to choose a development strategy for rapid and direct realization of a strong, independent nation. They chose the heavy-industry-oriented strategy. But this conflicted with China’s economic reality - Scarcity in capital endowment. To solve the problem, institutional arrangements were made to lower the barriers to heavy-industry development artificially by lowering price of capital, foreign exchange, energy, raw materials, agricultural produce, and labour. As a result, a macro-policy environment with distorted price was formed.

Chinese leaders chose the heavy-industry-oriented strategy for three reasons:

a. International competition – they wanted to achieve political independence and begin national economic development. They hoped this could help to reach a higher level of industrialization and leap over some economic development phases.

b. The constraint imposed by international political and economic environment – Korean War broke out in 1950 and China entered the war for the sake of its own security. The western countries led by US imposed a political isolation and economic embargo to cut off China’s normal channel of international economic exchange and trade. China was forced to quickly build self-sufficient industry structure.

c. China’s limited ability to effect industrial accumulation – since more than 80% of population were rural population, China had less accumulation for industry. The leaders believed the priority of heavy industry would help the capital accumulation.

Therefore, a Macro-policy Environment favored the development of heavy industry was formed. Heavy industry cannot develop under high interest rates when the project has a long construction cycle. SO a low-interest-rate policy was introduced. Besides, the foundation of heavy industry is capital-intensive equipments which were mostly imported....