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Introduction Since 1978, China has been experiencing rapid economic development. Currently, the country is the world’s second-largest economy and the largest single contributor to world growth. Although China has made impressive economic gains, its market reforms are still not completed. Its rapid economic growth has generated many challenges. The country’s per capita income still remains at the level of a developing country, less than one-quarter of the average of OECD countries. To find solutions for China and to boost its economy, this essay looks into how China’s economy has evolved, what has changed, and what has caused the changes in its economy over the past 15 years. Analysis The first indicator which this essay is examining is Savings Rates in China for the past 15 years. Savings is defined as current income minus current spending on means. The definition can apply to an individual, household, a firm or even the whole economy (Birch 2019, p. 3). If the savings rate of a country is high while the disposable income of households remains constant, it can be inferred that the spending of the country is relatively low. Low spending negatively affects a country’s economic growth. The line graph illustrates that China’s gross savings remained high at around 45% to 55% for the last 15 years, reaching its peak in 2008. Even though there has been a downward trend since 2008, China has maintained the highest savings rates as compared to other countries during this time. Household savings in China is the biggest component of the whole savings (shown in figure 2). Gross Savings Rate as a percentage of GDP of China and other nations Figure 1. Source:
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Household Savings as a % of Total Savings in China Figure 2. Source: There are many reasons that explain the changes in savings rates in a country. This essay focuses on the impacts of the one-child policy, pension reforms and income uncertainty on China’s savings. The one-child policy has affected the life-cycle savings in Chinese society. The one-child policy in China was designed to control the birth rate in a fast-growing population since implementation of Maoist policies for pronatalism. The policy was strictly conducted in the urbanareasduringtheearly1980s(Choukhmane,Coeurdacier&Jin2014).The consequences of the one-child policy were a sharp fall in nationwide fertility rate and then a spike in the proportion of the aged population soon after (Choukhmane, Coeurdacier & Jin 2014). In China, children provide support to the aged generation. Parents bring up their kids and provide education to them. In turn, these kids grow up to provide financial and other in-kind support to their parents when they retire (Choukhmane, Coeurdacier & Jin 2014, p. 1). Beyond this cultural custom, there is a compulsory law that when kids become adults, it will be their duty to assume full responsibility of their ageing parents (Choukhmane, Coeurdacier & Jin 2014). Under the one-child policy and constitutional law, parents have to save more to ensure the expected transfers while young individuals have to reduce spending to support their parents when they grew up. Apart from the one-child policy, the pension reforms also influenced China’s economic growth. The recent reforms in pension policies contributed to a fall in pension replacement income, which forced households to save more, thus increasing savings rates in China (Cristadoro & Marconi 2012). Income uncertainty also played an important role in raising rates for precautionary savings in China.Overthelastfewdecades,Chinahasamazinglytransformedfromaclosed, agricultural and socialist economy to an open, industrial and market-oriented economy. (Chamon, Liu & Prasad 2013, p. 1). These structural shifts have not only brought on rapid growth for the country but also resulted in increased uncertainty (Chamon, Liu & Prasad 2013). The labour force has to get trained from time to time for upgrading its skillset so that it can adapt to these changes. This is leading to structural unemployment in the country. The
increased uncertainty due to these massive structural shifts might explain the increase in savings rates. The second indicator being examined is the Gross Domestic Product (GDP). GDP measures the final value of goods and services that are produced in an economy over time (Birch 2019, p. 7). Real GDP is measured by taking into account the change in prices from one year to the next (Birch 2019, p. 27).The formula for GDP is equal to consumption plus investment plus government spending plus net exports. Any of the mentioned elements can change the total amount of GDP. China has been witnessed the fastest growth in GDP for the past 15 years, even though its GDP growth rate has decelerated since 2007 (shown in the graph below).This essay emphasises the contribution of investment, government expenditure and net exports towards the GDP growth of the country. GDP Growth Rate in China and other nations Figure 3. Source: As existing literature concerns, foreign direct investment (FDI) is highly correlated with economic growth (Coughlin & Segev, 2000 cited Xue 2015, p. 16). China’s ‘go global’ strategy, proposed in 2000, has given a massive raise to both FDI within the country as well as domestic investment in foreign companies (Xue 2015). In order to support the above strategy, the Chinese government included it in the 10th, 11thand 12thFive-Year Plans (Xue 2015). When gross investment increases, while other elements remain constant, the total amount of GDP will increase as well. China’s continuous investment in foreign economies is one of the reasons why its economy grew. As we know, the Chinese government has enormous impacts on its economic growth.The most noticeable thingis that the government has been raising spending on Research and Development(R&D).Forexample,duetothebackingofthegovernment,Huawei Technologies has become one of the largest manufacturers and telecom equipment suppliers. One of the secrets of the company’s success has been its spending of about 10% of its annual revenues on R&D(). The Chinese government not only assists giant technology companies but also encourages Chinese people to be innovative and own technologies by introducing an
indigenous innovation policy. The Government has targeted spending ratios of 15% of total R&D expenditure by 2020(). Last but not least, China’s net exports have kept its economy booming. According to the study (), net exports and economic growth have a bidirectional and causal relationship- net exports lead to economic growth and growth in the economy increases the volume of net exports. Since the time China transformed into an open economy, trade volumes went up manifold. China’s annual international trade volume increased from $21.08 million in(Please mention the year)to $2,207.22 billion in 2009. In the meanwhile, the GDP in 2009 reached a high level of $2937.22 billion (). The last indicator being examined is GDP per capita. GDP per capita is different from GDP. Real GDP per capita is the product of average labour productivity and the share of the population that is employed (Birch 2019, p. 11). The Cobb-Douglas production function demonstrates that the amount of output produced is a function of the primary factors of productionviz.capitalandlabour,aswellassecondaryfactors,viz.technology, entrepreneurship and so on (Birch 2019, p. 33). Compared with the graph of GDP growth, China’ GDP per capita has a similar growth pattern. The country has maintained a high average GDP per capita growth rate, between 8% and 10% for the past 15 years. The dollar value of China’s purchasing power parity is steadily increasing from almost $0 to $10. In spite of a booming economy, the amount of the country’s GDP per capita is far behind that of other developed countries. This essay pays attention to the growth of China’s GDP per capita and analyses the labour productivity and the size of the employed population. GDP Per Capita Growth Rate in China and other nations Figure 4. Source:
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GDP Per Capita (Current US$) in China and other nations Figure 5. Source: Firstly, as discussed above, the one-child policy has significantly impacted economic growth in China. One of the results of the one-child policy has been a rapid accumulation of human capital (Choukhmane, Coeurdacier & Jin 2014). When parents saw children as their old-age support and invested a large amount of money in their education, the quality of education improved (Choukhmane, Coeurdacier & Jin 2014). With time, more human capital with higher levels of education, training and skills in China led to greater labour productivity. Another consequence of the one-child policy was the shift in the demographic structure. Since the implementation of the policy, China has been consistently experiencing a rise in the proportion of the middle-aged population, from 19.7 years in 1970 to 34.5 years in 2010 (Choukhmane, Coeurdacier & Jin 2014). The spike in the middle-aged populace has provided a labour force with greater potential to the country. Secondly, China’s labour productivity has also been influenced by labour mobility among sectors of the economy. The structure of the Chinese economy has changed significantly from the primary sector to more-productive secondary and service sectors (Li et al. 2017). Thirdly, labour productivity relies on the people who decide what to make and how to produce the outcome. Entrepreneurship and management are critical to a dynamic economy in this regard. China has shifted away from necessary-basedentrepreneurshipto opportunity- based entrepreneurship. Since 2015, entrepreneurship in China has been stepping into a golden development era (Huang, Liu & Li, 2016).
In conclusion, it can be said that labour productivity has developed significantly in China and the size of the labour force is benefited by the increase of the working-age population. Policy recommendations In this section, a few policy recommendations to boost the Chinese economy have been discussed. The first suggestion is for savings. Savings are potential investments for the future and affect the amount of consumption. When investment and consumption go up, the economy of a country will be stronger. In China,safe-insurance(Please check whether safe-insurance or self-insurance)needs and precautionary savings are motivated by the lack of adequate pension expenditure and income uncertainty (Cristadoro & Marconi 2012). So, the Chinese government should act quickly by increasing spending for health care, pension system and social security. The government also needs to enhance welfare, increase the minimum wage levels and pass a law for companies to provide compulsory skill training to employees. In the meantime, the government can encourage households to take on debt, invest in financial assets and consume more. The second advice is for labour productivity. Human capital is an important component of labour productivity. The total number of tertiary enrolment in China climbed from less than 3% to almost 19% from 2001 to 2010 (Heckman & Yi 2012). Although there have been many obvious achievements in education during the past 15 years, education inequality in China still hinders its economic growth (Heckman & Yi 2012). From this perspective, the government should foster its economic growth by increasing expenditure on education, expanding access to all levels of education and enhancing the quality of education. Another element of labour productivity is the secondary factors of production. It is a common belief that technology improves productivity. China is facing a serious middle-income trap, where there is a wide technological gap between China and the most technologically- advanced countries (Fu, Woo & Hou 2016). To tackle the challenge, the first thing the government should do is to develop creativity. The Chinese education system is focused on teaching students existing knowledge and doctrine, rather than inspiring critical thinking (Fu, Woo & Hou 2016). Due to this obstacle, China needs a root-and-branch reform for its education system. Lastbutnotleast,increaseingovernmentspendingcanbeconsideredagood recommendation for the Chinese government. Technology is an output of R&D. According to Li (2009), information technology contributed to the share in the total factor productivity (TFP) growth during the 1995-2004 era. So this essay recommends the Chinese government to fund R&D and invest in information technology. Conclusion This essay discusses the changes in the three important indicators of China’s economy and examines the reasons that brought the change in savings, GDP and GDP per capita. Based on the examination, few policy recommendations have been suggested to aid the Chinese economy to thrive in the future.