Problems In China`S Economy Problems In Chinas Economy And Their Solutions Today, at the turn of the century, the Peoples Republic of China who has a history of over 5000 years is facing a very important choice. After the revolution of 1949,new China has devoted himself to improving his peoples living condition, and developing the economy. Although we encountered some difficulties on the way of development, we still make a rapid progress in many fields, such as, we have already solve the problems of how to feed a forth of the world population which seems impossible and difficult to the developed countries, our country has already become an important power in the world not only politically but also economically. After we adopted the policy of reform and opening to the world in the year of 1978, our economy grows steadily and rapidly than ever. And our economy in recent 20 years has become a wonder in the history of the world economy. However, with the undergoing reform, we now face some problems.
First, after so many years fear of inflation, our economy has an inclination of deflation. Second, for the agreement with the United States on entry in World Trade Organization (W.T.O.), our State Own Enterprises (S.O.E.) face many problems. Third, we still have some troubles in our policies. In addition, the unstable political environment (such as peaceful evolution from socialism back to capitalism, the threats of imperialism and other enemy countries) force us to develop our national power as fast as we can. As we all know, everything has its own shortcomings, but those shortcomings are not important, the important thing is trying to solve the problems you have. This comes out a choice, to solve problems and have a better life or to keep everything going on like it is.
We must take our responsibility to make a choice like the former one, for this choice will have a great effect on our country and peoples in the near future. Now let us talk about the problems faced in front of us and try to figure out their solutions. It is known that in recent years, while Chinas GNP (Gross National Product) grows fast, its economy always suffered with inflation. However, from 1996, our economy encountered the problem that never expects deflation. This tendency of deflation actually came after the financial crisis in Asia.
Our export decreased abruptly and considerably, our consumers purchase power reduced suddenly, and the supply apparently surpassed the demand. Why does it change so quickly? Nowadays our economy is under transformation. During the transformation period, there have many changes taking place. The source of peoples income has changed. First, in order to increase employees enthusiasm for work, the portion of allowance, bonus has increased a lot.
The portion in 1997 is 37.93%, compared with 2.79% in 1978. For the income of retired workers is determined by their standard wages, when the portion of standard wages decreased, the income of retired people reduced relatively. Second, compared with youth, old people should pay more for health and medical purposes, which makes income of retired people seems relatively low. The other change is retirement period, in which income is relatively lower, has been extended. This has two main causes, too.
First, the average lifespan of Chinese extends for the development of public health services. It is estimated that in 2000 the average life expectancy of female and male of 60 years old now will be 85 and 83 years old respectively. Although the retired age has not been changed, the extension of life means the extension of retirement period. Second, in order to increase economic benefits, many employees are forced to retire before the retirement age. In fact, this means the extension of retirement period, too.
For the relatively reduction of retired workers income and the extension of retirement period, more and more people incline to save their money for future use. As they think they must save much as they can to solve future problems in case they do not have enough money at that time. Furthermore, a recent survey in Shanghai shows that about 70% families will use their savings for their own living after retirement. As we all know, working people would like to save some money during their working period in order to keep a good living after retirement. Therefore, the higher the proportion of working personnel in an economy, the more inclination people would have to save money.
This proportion has increased dramatically since our reform, in 1997 it is 56.9% compared with some 40% in 1978. This increase adds another point to uprising savings deposit. Compared with planned economy, market economy has many uncertainties. Fluctuation of economy, changes of interest rates exchange rate, unemployment rate and inflation make up risks in market economy. For China is in the period of transition, the old income distribution system is bankrupt gradually, risks of people in cities and towns improve rapidly. Personal risk is the major cause of disparity in income distribution. Now, the weakness of domestic demands, the drop in growth rate of export and the increase of laidout workers make this risk surge. According to the research of Skinner (1998) and Cabalkro (1990), strong uncertainty will make people save money for precaution.
Therefore, we can conclude that the increase in uncertainty of income is a main cause of the increasing savings deposit. Keynes, an American Economist, established a famous psychological theory, which says consumption inclination goes down with the growth of income. And researches of Carroll and Kimball (1996) also proved this theory. According to all these researches, in China the consumption inclination of low-income people is more than high-income ones. As I state before, our country has a considerable disparity in income distribution.
Although its not as great as some capitalist countries, we must pay more concern on it for its unexpected increase. With the cake of disparity becomes bigger, the consumption inclination decrease in turn. In 1985, the average consumption inclination rate of Chinese is 0.94, and that of high-income people is 0.84, this difference makes us know how Keynes theory works. In 1977, with the increase of income to all people, the average inclination rate is 0.71. From this, we can see to what extent the change of income affects the consumption inclination. After twenty years reform, Chinese peoples living condition has been improved a lot, the saturation of residents possession of electronic appliances shows that there will be a great change in consumption structure.
Housings and mobiles will become a main part of peoples consumption. But apart from unfinished lodging distribution reform, the restriction of mobility also makes people to save more money to achieve their dreams of possessing big houses and cars in near future. People with average income are affected a lot by mobility restriction. To them, it would take their whole lifes effort to possess their own houses, so they must try to spend less and save more to accomplish their futures goal. Furthermore, with the reform of education system, more and more people have to save their earnings for their childrens education. All these issues make peoples consumption inclination reduced.
Well, we have got a lot of problems in domestic demands and deflation. Now, lets find out some solutions. As we realize, todays weakness of domesric demands hinders the growth of our economy a lot, we must figure out some efficient policies. As I think, wed better adopt the following four policies at least. In the first place, to improve the social security system, make people believe this system, in order to reduce peoples investment in precautionary savings.
This needs us to spread propaganda among the masses about our policy. Second, try to finish reforms of the housing system, endowment insurance, health care, employment and education, which we call the five main reforms. As to reform means reallocation, more and more people realize their uncertain life in near future. On the other hand, more thoroughly we accomplish reforms, less risk people would have in the future, and the less precautionary savings. Third, to adopt efficient measures to reduce the growing disparity between the rich and the poor. Chinese consumption inclination goes down with the growth of their incomes, so only if we reduce the income disparity, the general consumption standard will increase expectantly. To intensify tax revenue reform, use progressive tax to help our social security reform, therefore risks of peoples future income will be reduced, at the same time, the disparity of peoples income will become less, too. Last but not the least, perfect consumption credit system, raise the amount of consumption credit.
As I point out ahead, the restriction of mobility registers a vital score on deflation and the weakness of domestic demands. So regulate consumption credit system will do a favor to relax this restriction and improve the consumption standard at large. Now, lets find out other problems in our economic system. As we all know, China has already finished bilateral negotiations with many WTO (World Trade Organization) members, especially the United States of America, the largest member, on Chinas entry into WTO. So it is expected that we will become a WTO member later this year.
But what does it affects our life, we have not thought about this question carefully although we have used all our efforts to achieve this goal. Its a matter of fact that all things have good effects and bad ones. For good effects, first, after entry into WTO, our economy will blend with international trade system, which will make our economy more normally and systematically. Second, entry will help us to eliminate other countries trade barriers. And it do good for to export our products and attract foreign investment. On the other hand, we will also get some serious and challenging troubles in return after the entry.
Because we must lower our tariff level in almost every aspects, foreign commodities will pour into our near-saturated market, and the great challenges from foreign companies will cause some SOEs (State Owned Enterprise) near the edge of bankruptcy. Here are some necessary concessions we have to make for the entry. In agricultural industry, according to the agreement between the United States and us, by the year of 2004 we must reduce our import tariff on …