Final

Exam of
China
Econom
y

Professor: Duan Pingfang

Student: Oussama EL MIMOUNI 202012012050014
 1. Why did China adopt a leap-forward strategy before 1978?

China adopted between 1958 and 1960 a leap-forward strategy to organize its vast population,
especially in large-scale rural communes, to meet China’s industrial and agricultural problems.

The Chinese government at that time hoped to develop and speed-up methods of industrialization,
which would emphasize manpower rather than machines and capital expenditure.

Thereby, it was hoped, the country could bypass the slow, more typical process of industrialization
through gradual accumulation of capital and purchase of heavy machinery. The Great Leap Forward
approach was epitomized by the development of small backyard steel furnaces in every village and
urban neighborhoods, which were intended to accelerate the industrialization process.

The promulgation of the Great Leap Forward was the result of the failure of the Soviet model of
industrialization in China. The Soviet model, which emphasized the conversion of capital gained from
the sale of agricultural products into heavy machinery, was inapplicable in China because, unlike the
Soviet Union, it had a very dense population and no large agricultural surplus with which to
accumulate capital. After intense debate, it was decided that agriculture and industry could be
developed at the same time by changing people’s working habits and relying on labor rather than
machine-centred industrial processes.

2. Why China's reform has been tremendously successful while

the reforms of the former Soviet Union and Eastern European
countries have encountered dreadful difficulties？

Soviet Union was a better example of a socialist system and planned economy when compared to
China. It was established way before People’s Republic of China and took significantly more time to
give up on socialist ideology. But during their respective transition periods China followed a policy of
gradual changes under the state control while Russia went for a more radical system change. These
strategies can be called state-directed transition strategy and neoliberal transition strategy
respectively. China was significantly more successful than Russia and other post-Soviet Countries.

China and Russia has many things in common such as large geographical area, tremendous amount
of natural resources, relatively cheaper labor force, attractive markets for foreigners. But they also
had very different situations right before they started to implement transition policies. China was one
of the poorest countries with a per capita GDP as low as $185 in 1977. The average growth rate of
the economy for last 5 years of socialist era was around 4.2% but standard deviation of growth rate
was around 3.75% and it is high enough to call the economy non-stable. During 1974-1976 country
was hit by an insurmountable political situation which led to a paralysis in economic policy making.
Finally, in 1978 new economic reforms introduced and China entered to the reform period.

USSR on the other hand was experiencing a very difficult political situation during its last years and
also trying to make gradual transformation to a less communist economy. However, economy in
general was not a poor one as China was before reforms, even not comparable. USSR was second
largest economy in the world after US in real terms and she had $9,211 GDP per capita and
considering Russia was the main player of the union we can think that she had even higher GDPPC.

China and Russia followed very different reform strategies. China’s strategy can be called state
directed transition strategy which was a gradual approach to reforms, while the path Russia followed
can be named neoliberal transition strategy and it can be characterized with radical reforms.

China started its reform period in 1978 and the idea was to transform to market economy through
gradual policies. China did not want to accept advises from western world and the idea of rapid
transformation. Some may also argue that China’s success in economic development was not
because of but despite the strategy they have chosen. Chinese leaders considered this state-directed
strategy to be a safer strategy. They did not change the political system and Communist party
maintained its control, reform policies were to be made on economic system. Slow gradual changes
would let them to carefully analyze the next step they would take without taking much risk. In other
words, China decided thinking long term, but acting short term.

Russia was in a very difficult economic, political and social situation during the initial years of the
reforms. Soviet Union did not collapse easily, during and after the collapse wars between and inside
member countries and nationalist revolutions were taking place all over the post-soviet area
including Russia itself. Russia was trying to control this situation and if possible to maintain its power
on other post-soviet countries. Changing an economic and political system established during 70
years in a very short period of time is not easy, people in general were not happy with the reform
strategies. The main reason behind this was that the radical changes were creating strict problems in
the economy such as very high inflation. Poverty was a very common problem. As mentioned before,
the system in last years of Soviet Union was very corrupted and it was not easy for Russia to get rid of
this problem. Instead, the corruption and illegality was more likely to increase during radical
economic and political changes. Crime rates were very high in the country starting from the early
1990s and number of crimes during 1993, 1994, 1995 were twice as many as 1991. Rise of illegal
gangs, almost non-existence of law, and extreme corruption lasted many years.

Chinese reform strategy with gradual changes with state directives was quite different from Russia’s
rapid transition strategy to market economy. China started with one of the poorest economies of the
world and became one of the largest. There were several major reasons behind the China’s success
but the most important one is that the Chinese was not fixated on rapid speared of development
their concern was on the actual quality of growth, are people in this process of development gaining
mistrial of the processes not just the production and the technology but are they actually taking
greater responsibility for running society for administering society, are you over coming income gaps,
are you overcoming the gaps between who managing factories and those who works in factories,
these are the factors which the Chinese were majoring their success and it works.

3. Why comparative-advantage-following strategy is the key to

economic success for developing economies？

Comparative advantage can allow you to increase the profitability and efficiency of your company as
you rely on the resources and lower cost of labor in other countries to lower the expense of goods
and materials. Comparative advantage can also allow you to gain a competitive advantage over other
companies by passing savings along to the consumer.
The benefit of comparative advantage is the ability to produce a good or service for a lower
opportunity cost. A comparative advantage gives companies the ability to sell goods and services at
prices that are lower than their competitors, gaining stronger sales margins and greater profitability.
Lower costs aren't the only benefit of comparative advantage. Entering into trade with other
countries can also create job opportunities where they may have been done before.

Lower opportunity costs and higher profit margins: Nations—or companies—that have a comparative
advantage can focus their labor, capital and resources on production that requires a lower
opportunity cost and therefore achieve higher profit margins.

Increased efficiency: Companies choose to specialize their production on goods or services that they
can make more efficiently and then purchase what they cannot efficiently create from trading
partners.

Absolute and competitive advantages: Companies that engage in commerce do so to capitalize on

advantages. In doing so, they may gain a competitive or even absolute advantage.

Less-developed countries have benefited from globalization by leveraging their comparative

advantage in labor costs. Corporations have shifted manufacturing and other labor-intensive
operations to these countries to take advantage of lower labor costs. For this reason, countries such
as China have seen exponential growth in their manufacturing sectors in recent decades. Countries
with the lowest labor costs have a comparative advantage in basic manufacturing. Globalization has
benefited developing countries by providing jobs and capital investments that would not have
otherwise been available. As a result, some developing countries have been able to progress more
quickly in terms of job growth, educational attainment, and infrastructure improvements.

4. Describe the characteristics of China’s gradual reform approach

Reforms in China developed gradually, starting in the rural areas with the household responsibility
system and township and village enterprises. Steps to open the economy to foreign trade and
investment only started to play a significant role in the 1990s. Financial sector and State-Owned
Enterprises (SOE) reform was also gradual, gaining momentum only in the mid‐1990s.

Gradual experimental reform was also a pragmatic approach in a heavily distorted environment in
which "first best" solutions were unlikely to apply. Experimental reforms, confined to specific regions
or sectors, allowed the authorities to gather information on the unanticipated effects of reforms.
They were also able to develop and test the administrative procedures and complementary policies
needed to implement the reforms. Success meant the experiment could be expanded to other
regions and sectors.

Finally, experimental reform also saved reformers from 'losing face'. An experiment that did not
work could be abandoned rather than condemned as a policy failure. The strategy reinforced the
credibility of reform over time. By making reforms one step at a time, and starting with those most
likely to deliver results, the government built up its reputation for delivery. Every successful reform
helped the next one. This also built up experience and skills for the design and implementation of
reforms, gradually China to build up its “reform” capital.
Decentralization of authority became a powerful tool. The provinces and local governments received
increasing authority over investment approvals, fiscal resources, and policies. Provinces,
municipalities and even counties were allowed, even encouraged, to experiment with reforms.
Successful experiments became official policy and were quickly adopted throughout the country. By
decentralizing, China turned the country into a laboratory for reforms.

The fiscal system and the political organization within the party were key in aligning subnational
government incentives with that of the center. The fiscal reforms introduced in 1980 formed a de
facto tax contracting system, with high revenue retention rates for local governments, particularly
set for growth. For instance, Guangdong province paid a lump sum in revenues to the central
government, and retained 100 percent of the rest. The benefits of reforms were distributed broadly
across the population and governments, creating strong incentives to pursue growth and promote a
market economy.

Within the party, achieving growth—by creating jobs and attracting investment—quickened
promotions. Social achievements also played a role, but success with GDP growth – especially in the
regions – was paramount to climbing up to higher posts. This regional experience enabled the most
talented to demonstrate their capacity to reform. A disadvantage was imperfect macroeconomic
control and repeated bouts of inflation driven by local government loosening of investment and
credit controls. These conditions gave rise to local protectionism, which threatened to undermine
China’s unified market. In 1992, reforms regained momentum after Deng Xiaoping's "Tour through
the South", but inflation re-emerged, and the agenda became one of centralization of policies. Fiscal
and financial reforms followed aimed at creating the tools for macroeconomic management in a
market economy.

In the course of reforms, the country's own particular transitional institutions emerged. The "dual
track" system for growing out of the planned economy was the preeminent of all transitional
institutions. It allowed a continuation of the planning system at planned prices, which avoided the
collapse of production. But on the margin the system allowed a non-planned economy to emerge.
This also provided the information needed to gradually reform within-plan prices in such a way that
by the time of the abolition of most material planning in the mid‐1990s, plan and outside‐plan prices
had been largely aligned.

In my view, China's reforms can be distinguished in three phases: Market Seeking reforms, roughly
from 1978 to 1993; Market Building reforms from 1993 to around 2003; and Market Enhancing
Reforms from about 2003 onwards.

5. Describe the advantages of China’s gradual reform approach

and discuss implications for your mother country’s reform and
development.
There were several major reasons behind the China’s success but the most important one is that the
Chinese was not fixated on rapid speared of development their concern was on the actual quality of
growth, are people in this process of development gaining mistrial of the processes not just the
production and the technology but are they actually taking greater responsibility for running society
for administering society, are you over coming income gaps, are you overcoming the gaps between
who managing factories and those who works in factories, these are the factors which the Chinese
were majoring their success and it works, China's growth has reduced poverty. Only 3.3% of the
population lives below the poverty line. China contains about 20% of the world's population. As its
people get richer, they will consume more. Companies will try to sell to this market, the largest in the
world, and tailor their products to Chinese tastes.

Growth is making China a world economic leader. China is now the world's biggest producer of
aluminum and steel. Chinese tech companies quickly became market leaders. Huawei is the world's
top telecommunications equipment maker. It is quickly becoming a world leader in developing 5G
technology. Lenovo is a world-class maker of personal computers. Xiaomi is one of China's top
smartphone brands.

For my country Morocco, since the mid-1980s the Moroccan government has undertaken a vigorous
program of privatization and economic reform, encouraged by major international lenders such as
the World Bank and the International Monetary Fund. Measures have included selling state-owned
enterprises, devaluing the currency, and changing pricing policies to encourage local production. In
1999 the Moroccan government set up a loan fund to stimulate growth and competition among
small businesses. Morocco’s sandy beaches, sunshine, diverse environments, and rich cultural
heritage give it outstanding potential for tourism, which the government has been actively
developing. the Moroccan society benefited from sophisticated institutions that facilitated policy
coordination and commitment. But, the existing institutions hampered the participation of large
segments of the population and political parties representing them in the policymaking process. Also,
the centralization of administration hindered local initiatives. However, numerous and significant
structural reforms have been undertaken in the 1980s and 1990s and in recent years a strategy has
been adopted that combines continued economic liberalization, increased democratization, and
efforts to reduce poverty and promote human development. These changes have started to bear
fruit in the past few years.