Lessons Nepal can learn from the economic growth of China

Lessons Nepal can learn from the economic growth of China

Currently, China is one of the world's fastest growing economies with GDP growing at the rate of 9.7% in 2011 (Jha, 2011) and one of the world's third largest traders (Lardy, 2007). Prior to 1978, China was not as it is today. It was a closed and centrally planned economy with low levels of economic growth. A large portion of its economic output was directed and controlled by the state itself including setting of production goals, control of prices and allocation of resources. Individual farms were collectivized into large communes, huge investments were made by state targeted towards rapid industrialization, foreign trade was limited, private enterprises and foreign invested firms were non-existent and the central goal of Chinese government was to make China's economy relatively self-sufficient. Such a government policy kept Chinese economy relatively stagnant and inefficient, mainly because there were few profit incentives for firms and farmers, competition was virtually non-existent and price and production caused widespread distortions in the economy (Morrison, 2006).
Followed by low economic growth, China endorsed Public sector reform in 1978 to restructure its economy which played a crucial role in boosting its economy to present level. The reform encouraged the formation of rural enterprises and private business, liberalized Foreign Trade and investment, relaxed state control over some prices and invested in industrial production. Reforms included the following activities:
1. Centrally Planned economy changed into market economy
Economic control of various enterprises was given to provincial and local government, which generally allowed them to operate and compete on free market principles rather than under the direction and guidance of state planning. Similarly, coastal regions were designed as open cities and development zones which allowed them to experiment with free market reforms to offer tax and trade incentives to attract Foreign Investment. State gradually eliminated its price control on a wide range of products as well as freed many enterprises from the constant intervention by state authorities. This encouraged economic efficiency by introducing profit incentives to rural collective enterprises, family farms, and small and private business enterprises. The profit incentives appeared to have had a further positive effect in the private capital market as factory owners and small producers eager to increase profits devoted more and more of their firms' on revenues to improving business performance (Hu, 1997). Thus, market oriented reform created efficiency in productivity of inputs.

2. Open-door Policy and liberalization of economy as a long term economic policy of the country
Open door Policy helped to liberalize and modernize the Chinese economy. Foreign trade was decentralized. This created a competitive environment for business. It lowered the trade barriers and created a congenial environment for foreign investment. China's trade boom is largely the result of large inflows of FDI into various sectors. Over half of China's trade is accounted for by foreign invested firms in China (Morrison, 2006). Government developed various infrastructural facilities including course roads, electricity to attract FDI (Jha, 2011). Likewise, four Special Economic Zones were established to attract Foreign Investment, boosting export and importing high technological products into china. Availability of cheap unskilled labors also played a crucial role to attract Foreign Investment as well as compete in international product market. In addition, it undervalued its currency to boost its export sector. Thus, China's reforms on trade and investment played a major role in china's capital growth.

3. Increased Investment led by high rates of Saving

Apart from the foreign investment, it was also the domestic investment that triggered the economic growth. It was supported by the huge amount of domestic saving. China has historically maintained a high rate of savings. When reforms were introduced in 1978, domestic savings as a percentage of GDP stood 32% generated by profits of State Owned Enterprises (SOEs) which were used by central government for domestic investment (Morrison, 2006). Decentralization of economic production played a crucial role in substantial growth in Chinese household savings. In 2004, it reached 49%, the highest saving rate in the world (Morrison, 2007). Likewise, to increase the investment from private sectors it kept the interest rate low.

4. Land Reform and Property Rights
Laws and regulations on land were framed to attract Foreign Investment. As per new provisions made the land could be leased to investors for 15 years and if needed up to 75 years (Jha, 2011). Reform expanded property rights in the countryside and touched off a race to form small non-agricultural business in rural areas (Hu, 1997). This made efficient use of land and labor. Individual enterprises were set free to set their own economic goals. Selling state owned assets to the private sector has enabled big efficiency savings (Economics help, 2007).

In addition to these reforms were several other factors like giving high emphasis to consumption in recent china, introduction of Value Added Tax (VAT) and not to forget the political Stability of China which helped much to create environment favorable for attracting foreign investors.
The lessons that the Nepal can learn form the Northern nearest neighbor China is that self sufficiency policy can hinder the economic growth of the country. So, it is good to liberalize the economy to free market and trade. Foreign Direct investment (FDI) was highly emphasized by the governmental policy of China through the creation of Special economic zones. Therefore, FDI can be taken as one of the factors that can help to increase the efficiency of the economy by introducing the improved technology and infrastructural development of the country which are very essential for the economic development of the country. Establishment of Special Economic Zones or Charter Cities can be fruitful to attract Foreign investment and improvement of trade. Saving has to be encouraged so that future investments will be possible.
However, there are several constraints to country like Nepal to completely follow the path paved by the large economy such as China because of varying reasons. Land collectivization that was practiced in China is not possible for Nepal as Nepalese agrarian society practices the small fragmented land cultivation that do not allow for the massive production as much of the farmers are subsistence farmers cultivating in small pieces of land. Most of the industries in Nepal are privatized or partially privatized but because of their operation still in infancy stage does not make it possible to compete into world market. Nepal has been earning large sum of capital from remittances but these capitals are used in consumption rather than investing or saving. Political instability has hindered the creation of favorable environment for Foreign Investment.

References
Economics Help. Novemver 19, 2007. Reasons for Chinese Economic Growth 2000-2007. Retrieved online from: www.economicshelp.org/blog/china/chinese-economic-growth/
Hu, Zuliu and Khan, Mohsin S. 1997. Why is China Growing So Fast? International Monetary Fund. Retrieved online from: www.imf.org/external/pubs/ft/issues8/index.htm.
Jha, Hari Bansh. 2011. Public Sector Reform in India and China. Republica (daily), May 14, 2011, Nepal Public Media, Vol. III, Saturday, Pg. 6.
Lardy, Nicholas R. 2007. China: Rebalancing Economic Growth. Chapter1 from the China Balance Sheet in 2007 and Beyond. Center for Strategic and International Studies and the Pearson Institute for International Economics. Retrieved online from: http://www.piie.com/publications/papers/lardy0507.pdf
Morrison, Wayne. January 12, 2006. CRS Issue Brief for Congress: China's Economic Conditions. Congressional Research Service and the Library of Congress. Retrieved online from: http://www.fas.org/sgp/crs/row/IB98014.pdf