China: Reformation and its Growing Influence

In this blog, I will explore the most important factor for effective reformation in China in the post-Mao era and the factors that suggest that China's growing influence in the world. 

Historically, the power to make reformations through policy was contingent upon the power of the leader rather than the fixed rule of an established institution. By power, I here mean, the strength of the leader's faction in the Chinese Communist Party(CCP) and the relative ease with which the leader controlled the bureaucracy, State-Owned Enterprises(SOEs), mining and energy factions, and the public security apparatus. The major reforms occurred in the form of policy wave through the push of the central government aided by the bureaucracy and the local bodies.

Image Source: Straits Times

Let us compare two leaders--Zemin and Jintao--in terms of the leader's power and their effectiveness in leadership. Jiang Zemin, who was appointed as the leader in 1987, only consolidated his power in 1997 after the death of Deng Xiaobo. He was not able to bring any major changes until 1998. The political environment became better for Zemin as he had a few oppositions within the party and other relevant actors after 1997. After the consolidation in power, he brought about the policy wave mainly through privatization of small and medium-sized enterprises, the reformation in private housing and the joining of the World Trade Organization(WTO). In addition to Zemin's control in the party, this policy wave was successful because of the positive international environment, good ties with the United States and resizing of the bureaucracy. Zemin had gone to a successful trip of the United States and had cut majors tariffs for the entry into the World Trade Organization(WTO). He purged Chen Xitong, the party secretary of the Bejing who may have opposed him and streamlined bureaucracy leaving fewer or weaker bureaucrats to resist the policy. For effective implementation of policy, there should be a good tempo between the executive leaders and Xi maintained a close relationship with the Prime Minister in that direction.

Image Source: ThoughtCo

Hu Jintao, on the other hand, was a weak leader primarily because he did not have Communist Youth League people around him on the Politburo Standing Committee and because he did not have good relationships with the Prime Minister.  Similarly, the state-owned enterprises became very powerful during his era which impeded his effectiveness in power. He had to face the challenge from one of the eight immortals, Bo Xilai, who was backed by the energy sector so much so that he could not even close private coal mines that were killing 6,000 people a year. Therefore, there was no policy-wave during Hu's period. We can safely from these two examples that the extent to which a leader holds power in the party, government and with its actor is important in making reformations.  From the perspective of making ground-breaking reformations, why should we in Nepal complain about the Prime Minister getting more powerful if the concentration of power in the chief leader is good?

Now that we have laid out the leadership as the most important factor in the transformation of China, let us now delve into the factors that suggest that China's growing influence in the world.  We will first start with leadership.  XI Jing Ping has a different approach to the foreign policy than his predecessors--he is very proactive and has focused on self-identifying China as a big power. He is very affirmative on setting Chinese broad national interest, especially in matters of its territory.  The Chinese leadership is now thriving for world leadership rather than keeping a low profile. We see this trend before Xi was the president and Xi now is firmly committed to reshaping the international system as he has formally given up Deng Xiaoping's' lying low' strategy. Although China has succumbed to the global political order than most of the post-war socialist countries, China has been constrained by the international system. However, China is trying to reform the international system either by participating in international organizations or by creating new ones. As China gains more power, it may want to break up or reform the current international economic and political order.

Image Source: Zee News

Since China is rising in the unipolar system, China wants to pre-empt the United States’ contention policy in the different regions of the world. It is doing so by participating in existing international and regional organizations like WTO and ASEAN to make reforms to its best interests and to enforce its influence. Moreover, it is also establishing new international organization such as Asian Infrastructure Investment Bank(AIIB), similar in modality to World Bank and IMF established after the second world war, or the Pan Pacific Free Trade Area, which is the direct competitor of the American TPP idea. On top of that, China is now starting to build military bases in foreign countries which is now beginning to China. Similarly, China, under Xi's leadership, has initiated one road one belt initiative to counter American Initiatives such as Millennium Corporation Challenge(MCC). This scenario may lead to confrontation between the United States and China diplomatically and economically. The present sanction against Hawaii by the United States is one such example.

Nitty Gritty of South Korean Development

In almost every discourse about the development in Nepal, Korean example is cited as the epitome of the economic transformation. Korea is the only country in the world to have transformed an aid receiving country to aid-giving country. What are the factors behind the success of the Korean economy? The purpose of this blog will be primarily to examine this question. 

Image Source: Wikipedia

The real growth of Korea started only in the 1960s, by which time the country had made significant reformation in agriculture and macroeconomic indicators. By then, the country had created a strong foundation for the export industry through a periodic focus on low to high-end products during the 1950s. It achieved the latter through its policy of overvalued currency in the 1950s and import substitution policies. Similarly, the government did not allow for the massive money-financed deficit and did not follow a real exchange rate policy. The combination of these policies ensured the profitability of the traded goods sector. As a result, government policies have sustained relative financial stability.

The sustained high level of investment since the early 1950s and large external financing kept the engine of the economy running for it to achieve sustained economic growth. A high level of investment was possible because of a) its people's tendency to save b) support from the United States and the United Nations. By the 1960s, Korea decreased external financing as external investors were turning away from the grant to loan. Korea could sustain economic growth firstly because of a) its competitiveness in the labor market and b) vibrant and trusted trading partners. It traded manufactured goods with the USA, Japan, and China, all of which were large, vibrant and growing economies. The opportunity to work in the European countries at the beginning of the 1950s and in the Middle Eastern Countries in the 1970s was an added advantage to Korea. These were the difficult times for Korea as the country was in the poverty trap in the 1950s and had to hold ground during oil shock in the 1970s. In the 1980s, Korea liberalized its economy and protected its infant industries and while also opening its market to import certain material intermediate materials for its export industry. 

What was the Important Factor for the Development of the Korean Economy?

Image Source: Export Delaware Blog

It is not a single policy per se that paved the way for the success of the Korean economy. The opportunity to study and learn from Japan, Taiwan, and other East Asian Countries, which went through a similar phase of development a few decades before Korea, gave Korea an edge to plan prudently to follow the positive footsteps of these countries or to avoid pitfalls. The constant support from the United States and the United Nations through grants, aid, loan, technological support and even military support at times played another role. While North Korea had to go through a long period of depressed growth because of its closed economy, South Korea, on the other hand, because of its open economy, trade liberalization and good relationship with the Western Economy leveraged the unique political situation to its benefit. 

Talking about the policies, it was not a high-interest rate or low-interest rate, weak currency or strong currency, emphasis on agriculture or Heavy Chemical Industry, emphasis on the import or exports of the goods, or high reliance on the foreign aid or low reliance on foreign aid but the prudent selection of each of these choices when the situation demanded. For example, the government pushed for labor-intensive industries and brought programs to enhance human capital when there was high unemployment, but the country switched to heavy and chemical industries when the competitive edge in these industries dwindled. At times the government intervened excessively to correct misallocation and at other times it relaxed the command over the economy. I think the leadership that was very erudite, prompt, far-sighted, and strong-willed to understand the need of the given time to form the policies that best fit the situation was the most important factor behind the success of the Korean economy.

Which Factor Should Other Countries Copy? 

The underlying aspects of Korean economic development were labor competitiveness, high investment through high national savings and external financing, appropriate government intervention and good macroeconomic policies. Investment is necessary for developing countries to make a large infrastructural investment or to industrialize to trade volumes. Emphasis is given to foreign direct investment or foreign aid to ensure a large influx of much-needed investment but the Korean success story suggests that the domestic saving is as important to break the poverty tap and in striding towards the high sustained economic growth. This is one aspect I think the developing countries can copy and should copy. 

Image Source: Freight Waves

The United States and the United Nation had a huge role in the development of Korea through its economic, technological and military aid and its support as a trading partner. The United States, in particular, was concerned about the development of South Korea to make it superior to North Korea, which was an ideological enemy to the United States. Not all the developing countries have this luxury to get support from the hegemonic power like the United States.