Economic Development Of Vietnam And China Economics Essay

Economic Development Of Vietnam And China Economics Essay China has been a remarkably successful economy since its adaptation of market-oriented reforms in 1978. The countrys real GDP growth has averaged about 9% each year from 1979 to the present (Naughton, 1995). Vietnam has also gone through a terrific economic development after the countrys transition process from centrally-planned economy to a market economy and it also gone from a poor to a middle-income country in just 20 years. This essay is devoted to give an overview how the gradualist path of economic reforms of the late 1970s and early 1980s affected both Chinas and Vietnams economies and led to a high rate of development. I will analyze what factors made both countries to choose gradualism in contrast with Shock Therapy also known as Big Bang approach. While various scholars debate which approach leads to a better performance, I will demonstrate that in the case of China and Vietnam the gradualist approach turned out to be the more efficient one. Over the past five decades, East Asia has emerged as a region with several spectacular stories (i.e. Hong Kong, Singapore, Taiwan) of catch-up development. Both China and Vietnam have achieved remarkable economic growth since their economic reforms. Scholars (i.e. Popov, 2007) argue that the transformation of these two countries was caused by the adverse supply shock that resulted from deregulation of prices and change in relative price ratios that created the need for reallocation of resources in order to correct the industrial structure inherited from centrally planned economy. The end of Cultural Revolution in China in 1976 revived the two competing forces of institutional centralization and accelerated growth, which in contrast requires decentralization (Riskin, 1987). Two years later, in 1978, a plan of reform was adopted to deal with the imbalances in the economy. The transition strategy undertaken by China is termed a dual track reform path because there is both a planned and a market part of the economy. In this dual track path, there was not only one single reform attempted at one time, but different programs were also tried simultaneously until the new reform measure could replace the old system. In the case of big-bang reform, the old system is usually destroyed before the new system takes place. Vietnam has gone through a similar transformation over the past 20 years and shifted its economy from a centrally planned economy to a Socialist-oriented market economy. In 1986 the government introduced a policy package which is often referred as economic reform (Doi Moi). It combined government planning with free-market incentives and encouraged the establishment of private businesses and foreign investment, including foreign-owned enterprises. Both countries began their economic development from their agriculture sector, and in both cases, their attempts to build a Soviet-style economy failed, during their pre-reform period (Vu, 2009) Today both countries are major players in the global economy, where Vietnam is the worlds leading exporter of pepper, seafood, rice, coffee (Backman, 2007) and China is the second largest economy in the world after U.S. One might ask, how both of these countries with a Communist government could achieve such high level of economic growth, hence in order to understand how their transformation led to todays development, it is important to compare and contrast gradualism with shock therapy economic reform approaches. Big bang versus Gradualism A big bang or shock therapy approach implements various reforms on (monetary policy, privatization, trade and exchange rates etc.) quickly, whereas the gradualist approach spreads various reforms over an extended period of time. There are several arguments in support of big-bang approach to various types of reform. First, in the context of privatization, a big-bang approach provides a critical scale of privatized sector in the economy so that the privatized firms will be efficient (Roland and Verdier, 1992) Second, a big bang may increases the credibility of a reform (Lipton and Sachs, 1990) Third, the gradualist alternative gives time to reform opponents to organize themselves and thus invites a more formidable resistance (Krueger, 1993) In addition, in the context of price reforms, a gradual reform is undesirable, because it may induce an intertemporal speculation (van Wijnbergen, 1992). Finally, a big-bang approach brings the benefits more quickly (World Bank, 1991). On the other hand, there are various supportive arguments for a gradualist approach as well. The earliest statement in favor of this approach is from Confucius: More haste, less result. First, a gradualist approach may avoid excessive cost, especially for the government budget (Dewatripont and Roland 1992; Nielsen, 1993). Second, it avoids an excessive reduction in living standards at the start of a reform (Wang, 1992). Third, it allows trial and error and mid-course adjustment (World Bank, 1991). Fourth, it helps a government to gain incremental credibility (Fang, 1992). When the outcomes of reforms are uncertain to individuals, a gradual approach splits the resistance force and can thus increase the programs chance of surviving attacks by special interest groups (Rodrik, 1990). Gradualist approach to reform can be defined as a sequential implementation of minimum bangs (terminology from Williamson, 1991). A minimum bang is a simultaneous implementation of a minimum set of reforms that can be i mplemented independent of other reforms without failure. It is important to note though that, even across a set of minimum bangs, a gradualist approach may not always be better than a big bang. A reform program may not be able to overcome political resistance, if it is implemented by shock therapy, but it may become politically viable if it is implemented by a gradualist approach. Friedman and Johnson (1995) argued that in the presence of complementarities between government policies and enterprise attributes and convex adjustment costs for enterprises (i.e. costs increasing with the speed of reforms) radical shock-therapy reforms might not necessarily be optimal. Countries that chose to follow the big bang approach, found themselves in a supply-side recession, where the excessive speed of change in relative prices required the magnitude of restructuring that was simply non-achievable with the limited pool of investment. The speed of adjustment and reallocation of resources in every economy is limited, if only due to the limited investment potential needed to reallocate capital stock. This is one of the main rational for gradual, rather than instant, phasing out of tariff and non-tariff barriers, of subsidies and other forms of government support of particular sectors. This can be used as a powerful argument against shock therapy, especially when reforms involved result in a sizable reallocation of resources. It is also important, that the pace of liberalization had to be no faster than the ability of the economy to move resources from non-competitive to competitive industries. Differences in performance during the initial stage of transition depend strongly on the initial conditions and external trade patterns. In addition, changes in the institutional capacity of the state have dramatic impact on performance. Economic reforms in China and Vietnam after the pre-reform period It is definitely the strong institutional framework that should be held responsible for the success of gradual reforms in China and Vietnam, where strong authoritarian regimes were preserved and centrally planned economy institutions were not dismantled before new market institutions were created. The shock-therapy approach was not desired by China, because of its radical reform programs, therefore the gradualist approach was more likely to be successful, due to Chinas under-developed and under-industrialized economy with a large rural surplus of labor force. Chinas economic reforms can be divided into separate eras. The first one, which extends from Deng Xiaopings 1978 opening and reform to the early 1990s, the Communist Party emphasized rural development with relatively little interference from above, where the result was an explosion of small- and medium-sized businesses that created an enormous rise in employment and wealth. Deng created his first special economic zones in places along the coast, such as Shenzhen, where there was relatively little established industry. So the new companies that sprang up there were almost entirely private. Foreign investors piled in, but mostly under conditions that did not disadvantage local entrepreneurs. Outcome: everyone got rich together. Centrally planned economy was no longer viable in China; therefore changes were required to promote economic growth. Consequently, without a definite model in mind, China underwent a lengthy path of adjusting reform objectives from a planned economy with some market adjustment to a combination of planned and market economy to a socialist market economy. In Vietnam, economic reforms started in 1986 and they resembled very much Gorbachev-type marginal reforms in the same period. Vietnamese authorities have reaffirmed their commitment to economic liberalization and international integration. They have moved to implement the structural reforms needed to modernize the economy and to produce more competitive export-driven industries. In both Vietnam and China the economic reforms were initiated under certain circumstances that provided three critical factors for change: receptivity, crisis and opportunity (Vu, 2009). During their pre-reform period (China: 1953-1978; Vietnam 1954-1986)Â  [1]Â  they made extraordinary efforts to build their socialist economies, but they experienced failure rather than success. China was impoverished by the Cultural Revolution, while the Vietnamese economy was ruined by the collectivization of land, nationalization of privately owned industrial and trading establishments and socialist ideology-driven initi atives (Vu, 2009). Reforms became possible because of various internal and external factors in both countries. In China, the death of Chairman Mao in 1976 paved the way for Deng Xiaoping and his economic reforms, while in Vietnam, the radical reform programs launched by Gorbachev in 1985 in the Soviet Union, which was then Vietnams role model for economic development as well as its main provider of aid, to some extent were an inspiration for the Vietnamese leadership. Fforde and Vylder (1996) observed that the similar circumstances leading to reforms in China and Vietnam are behind the fact that the reforms in both countries were more economic than political. While the reforms in China and Vietnam were initiated under the pressure of economic despair and the need of finding a new way to recover the economy, the main concern of the leadership in both countries was to maintain political stability and the absolute power of the Communist Party. As a result, to justify the legitimacy of the political system, both countries chose a gradualist approach to reform with a special focus on economic growth. A big bang approach and a possible unsuccessful outcome of a reform could have destroyed the parties credibility and led to an up rise within the country, of what the regime would not have survived, so the two countries had no other choice than introduce new economic reforms only step by step. This gradualist approach addressed the easy problems first and left the hard ones for later. A radical approach (big bang) would aim to maximize efficiency gains and minimize the political costs of reform. The pacing and sequencing method of the gradualist approach gained popularity in both countries at the expense of advocating for immediate liberalization. One important feature of reforms is that people are not sure usually whether they are necessarily gainers or losers of a certain reform, therefore I believe that a gradualist approach may be politically more sustainable than the big bang approach, because it splits the resistance force and allows uninterrupted political support for the reform. On the other hand, if a reform program is strong at the start and well supported by the public, then a shock therapy approach is better both because it brings the benefits faster and because it is politically preferred to various schemes of partial or gradual reforms. There are of course other factors as well (export oriented industrial policy) that contributed to the rapid growth of these Asian transition economies and not just gradualism. Conclusion It is clear to see by now, that both countries went through huge changes in their economies in the past 20-30 years. The Communist leadership was able to maintain their power, but also open up more and create a unique socialist-market economy, where the state still owns the major industries such as telecommunications, national railroads, airlines and power. While there is only one direction for both China and Vietnam more economic reform and liberalization the Communist Party of these governments will certainly not tolerate any challenge to their power. They want economic change but not political one. While the two countries initiated their economic reforms from comparable economic and social conditions and have rather followed similar approaches to reform and economic management. Since the launch of these reforms, both countries have made impressive achievements in their growth performance; however their growth patterns have significantly diverged. China has far outperformed Vietn am in both the pace and the efficiency of growth. I dont think that there is need for comparison though, when both their historical and economic backgrounds, prior to the reforms, were different and also given the size of the two countries, China surely has an advantage due to its huge population. It is also important to keep in mind that while China has an advantage in government effectiveness, its institutional foundation remains weak, which is rather comparable with Vietnam. One of the issues that I found during my research is that in making comparative analysis between the shock therapy and gradualist approach, the country cases for big bang outnumber the countries that followed a gradual path and succeeded. China and Vietnam seem to be the only ones in comparison with a great amount of other transitional economies that followed the big bang approach. In this regard, the investigation of other similar cases following the gradual approach would be worth studying to have a better understanding and also a more accurate comparative analysis on different transitional paths adopted among different transitional economies. References: Backman, Michael. Chapter 16 Is Vietnam the New China. Asia Future Shock: Business Crisis and Opportunity in the Coming Years. Basingstoke: Palgrave Macmillan, 2008. pages 110-118 Dewatripont, M., and G. Roland (1992) The virtues of gradualism and legitimacy in the transition to a market economy. Economic Journal 102, 291-300 Fang, Xinghai (1992) Economic transition: government commitment and gradualism. Working Paper, Stanford University Khuong M. Vu. Economic Reform and Performance: A Comparative Study of China and Vietnam. China: An International Journal 7.2 (2009): 189-226. Project MUSE. 15 Apr. 2010 Krueger, Anne 0. (1993) Political Economy of Policy Reform in Developing Countries (Cambridge, MA: MIT Press) Lipton, D., and J. Sachs (1990) Creating a market economy in Eastern Europe: the case of Poland, Brookings Papers on Economic Activity 1, 75-147 (1990) Naughton, Barry. Growing out of the Plan: Chinese Economic Reform, 1978-1993. New York, NY: Cambridge UP, 1995. Riskin, Carl. Chinas Political Economy: the Quest for Development since 1949. Oxford [Oxfordshire: Oxford UP, 1987. Roland, Gerard, and Thierry Verdier (1994) Privatization in Eastern Europe: irreversibility and critical mass effects. Journal of Public Economics 54(2), 161-83 Rodrik, Dani (1990) How should structural adjustment programs be designed, World Development 18, 933-47 Van Wijnbergen, S. (1992) Intertemporal speculation, shortages and the political economy of price reform. Economic Journal 102, 1395-406 Vladimir Popov, 2007. Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms1, Comparative Economic Studies, Palgrave Macmillan Journals, vol. 49(1), pages 1-31, Wang, Yijiang (1992) East European puzzle and Chinese enigma: institutional changes as a resource allocation problem. Paper presented in Anaheim, January 1993. Working Paper, University of Minnesota World Bank (1991) World Development Report 1991: The Challenge of Development (New York: Oxford University Press) http://www.arts.usask.ca/economics/skjournal/sej-3rd/Lynden.htm Accessed: 05.01.2010 http://dspace.anu.edu.au/bitstream/1885/40425/1/cu99-5.pdf Accessed: 05.03.2010