The China Model UNIVERSITY OF THE PHILIPPINES CEBU Business Management Cluster Lahug, Cebu City

In partial fulfilment of the requirements in Economics 100.1 Macroeconomics (TF 2:00-4:30) The CHINA MODEL

Submitted to: Prof. Anna Marie Talam Date Due: October 15, 2013

Submitted by: Alicaya, Karen Mae A. Beniga, Karen Ann B. BS Management 3

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The China Model

I. SUMMARY The China Model described in the article is the current case the country China is experiencing in its political and economic systems. If the U.S. and U.K. have democracy, in China, its called the China Model. The article describes this model as economic freedom plus political repression. Throughout the article, the China Model is examined in the view of how China has developed over the years economically and politically. However, the real case is in the question: Will the model last in the long-run?

So what is really the China Model? The first aspect of the model upholds some liberal economic policies. One is opening up most of the countrys economy to foreign and domestic investment. This means that potential investors not only from China bust also from other countries could now establish their fully-owned firms without much restrictions. Next is that the country is refocusing on labour flexibility as well as having low tax and regulatory burdens. The country is even lenient when it comes to tax evasions from these taxpayers. Payments for regulatory policies are also kept at a minimum by the authority. Last of these liberal economic policies are creating first class infrastructures. These are created by combining government spending and private sector spending. If the relationship is good, so will the results of the creation of these infrastructures. The other aspect of the China Model as explained in the article is its ruling party. This is the unique characteristic that distinguishes the countrys system from others. The CPC or the Communist Party of China holds leadership in this model and all politically related activities are watched and controlled by the CPC.

The article also explains the history of how the China Model came to be. When Mao Ze Dongs communist ways fell short of the economic expectations of the country, Deng Xiaoping improvised and altered some of the problematic aspects and turned the political system into authoritarian regime with the focus on the increase of the living standards and the positive growth of the Chinas economy. This new system upholds the economic improvements while at the same time strengthening the power and the authority. Countries not only from the Asian neighbours but also from the West have taken into consideration this type of system because of how much it transformed the economy of China as a country.

While many countries desire to know more about this China Model, critiques question the country on how sustainable this model could be. The article referred to two books recently published about the answer to this question. One author Hutton from the UK Alicaya|Beniga 10/15/13

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criticized that the implementation of China Model is in danger because China has no business tradition that understands the facet of capitalism. He explains that the Chinese culture is not rooted on the trust that is the foundation of most capitalist nations. So according to Hutton, any moment in the future, the Chinese economy will dwindle due to the tensions in the economic social and political aspects. However, Huttons critic has been the opposite of what happen to China. The country with its current system remained strong and even improved. The other critic was made by an American author named James Mann who said that this opening up of China through its liberal economic policies will lead to democracy and liberalization of the country in the future.

The article summarizes the China is leading in terms of growth economically but not in the aspect of political freedom; while countries that practice both economic and political freedom are performing below standards. This implies that China is well-aware that its focus is to make the people happy in the economic side first and foremost. While others think that democracy is the first step to economic growth, China is thinking the other way around.

II. TERMINOLOGIES 1.) CPC- Communist Party of China- ruling political party of the Peoples Republic of China, leading both its political and social activities. 2.) Kai fang- Chinese term meaning opening up the doors and let in foreign capital, technology and management skills. 3.) Liberal Economic Policy- ideological belief that in organizing the economy, decisions are better done by individuals itself rather than collective 4.) Authoritarian- is form of government characterized by an absolute obedience of the citizens to an authority. 5.) Trade- is the exchange of goods and commodities between countries. 6.) Cash Economy- a kind of economy where payments are usually paid for in cash, thus taxes are not declared; with little use of Internet Banking or even of credit cards or mortgages. 7.) Tariff- is a tax imposed either on the goods exported or imported. 8.) Capital Account- is a part of the balance of payments recording a nation's outflow and inflow of financial securities. Alicaya|Beniga 10/15/13

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9.) Foreign Reserves- an amount of foreign currency owned or held by the government. 10.) Inward Investment- is the injection of money from external or foreign entity in order to buy and purchase the goods of the local economy. 11.) Outward Investment- is the injection of money of local or domestic entity to foreign country in order to expand its operation 12.) Kleptocracy- a form of government wherein officials take advantage of the peoples resources for their personal gain. 13.) Houkou System- is a system of household registration required by the law in the Peoples Republic of China. 14.) Tax Evasion- is an illegal non-payment or underpayment of tax. 15.) Political Repression- is preventing an individual or group people in taking part of the political aspect of the society, thus individuals are discriminated due to political reasons. 16.) Economic Freedom- is a condition wherein people act freely in pursuit of their economic livelihood and greater prosperity. 17.) Communism- is a theoretical economic system which suggests collective ownership of property. 18.) Commerce- is an activity that relate to buying and selling of goods and services. 19.) Diplomacy- is the art or practice of conducting international relations, as in negotiating alliances, treaties, and agreements. 20.) Imperialism- is a practice wherein a country increases its power through enlarging its territory.

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III. ANALYSIS A. Identify and describe the policy issues involved in the China Model. China Model is a perfect blend of economic freedom and political repression. Despite from the firm grip on government, still the countrys economy is unexpectedly in good condition. This is maybe due to well-implemented Liberal Policies in fiscal, monetary and economic aspects. First, the China Model created economic policies. This involves the Kai Fang which opens up the economy to foreign capital, technology and management skills. It makes the country as an export base. This is because of the fact that many foreign countries could now export their goods and commodities openly to China. Furthermore, this activity could boost their economic status. Not only that they welcome foreign investors to establish fully-owned firms but they also allow domestic investors as well. In fact, in 2007, China became the worlds third-largest economy after the numbers of foreign investments have dramatically increased. Second, the model is now shifting from inward investment to outward investment. Due to the ever expanding scale of operation of the Chinese entrepreneurs, foreign reserves have also increased in effect. These reserves are said to be needed in case there would be problems that would arise in terms of f inancial because of the shifting of Maos policy from populate to perish to one child policy. Third, they have policies concerning flexibility of labour because the countrys labour industry underwent transformations to become market-focused profit centres. This shows how fast Chinese labour force can adapt to the changing economy of theirs. As an effect to the opening up of trade in the country, neighbouring countries could easily import components parts to China, and the latter would in return assemble it. Thus improving and enhancing the capabilities of the local labourers. In addition, due to Huokou system, local workers are protected from competition against migrants. Fourth, policies involving taxation is also implemented. Tax evasion in specific is allowed in the country and so as regulation of taxes so that its burden may be lowered for peoples welfare. It is said that almost 75% of tax were evaded in proportion with their personal income. However, these policies are not meant to be free. In return, people are bound to follow the political authority. So far, middle class prefers to pay fewer taxes and not vote than to have the rights to choose and elect government officials and pay more taxes.

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Lastly, creations of first class infrastructures are also done. These are made possible because of the funds provided by the private sector and government spending. One excellent example for this is the SMIC or Semiconductor Manufacturing International Corporation project in 2000 founded by Chang. The Chinese government provided astounding incentives like zero tax, free land, syndicated loans and free research and development aid in order for Chang to be motivated to finish his project successfully. B.) Use the Reagan or Roosevelt test to identify what policies are for the Reagan side and which are for Roosevelt side. Support your answers. The Reagan side of the policies in the China Model involves the policies that do not necessarily need the role or the guidance of the government, or in Chinas case, the Communist Party of China. What the Reagan economics promoted was the reduction of taxes and reduction of government regulation. These policies are similar to some of what the China Model advocated. One of the policies is the government loosening its regulation on taxes. Since the China Model emphasized the economic policy of having low burden in tax and fees, we could see that the countrys working force, in return are paying lower taxes and the burden on regulation is relatively low. This is similar to what Reagan aimed for the United States of America. The Roosevelt side of the economic policies include areas in labour, control of foreign reserves and even the creation of first-class infrastructures subsidized by the government. The Roosevelt economics believed in the role of the government in the control of the economy. As what was explained in the labour policies, the China Model included Houkou, which is a household regulation system that protected local labourers from migrant workers. In this style, the government helps the rural workers from being replaced in their jobs by these workers not from China. Another is in the control of foreign reserves. Since the CPC takes hold of the banks of China, every transaction is controlled and the banks cannot control the reserves unless mandated by the CPC, so the flows of foreign reserves is kept at a pace wherein the CPC thinks is best for the economy. Next, government involvement in the creation of first-class infrastructures is very helpful to the economy of China, Just as what Roosevelts aim of helping the country through government funding. One example is when the Chinese government helped the SMIC in running its business by financing the starting operation and even giving zero percent tax for the company. Lastly, the decision of China to open its doors to foreign and local investors is an example of Roosevelt economics. Roosevelt advocated freedom in the economy and trade which is in a way similar to the open door policy created by China in its model.

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C. What is your personal Philosophy for Chinas economy? The China Model is a very ideal system from what it gives to the readers. We can say that this scheme has been very effective to the country in its economy. Since the country practices the liberal economic policies but a tight grip in the government sector, what we think is that the country is doing its best to capitalize its strength for the prosperity of not just for the government but for the people as well. In the economic aspect, this step taken by China is a very good thing. From the article, all the examples and sources all point to China taking the lead in the development in the development and prosperity of countries. All undertakings of China are for the country, whatever they do, like reforming policies and creating new ones, are all for the growth of the economy. They even reformed the economic system so it will be on the liberal side rather than on the strict side. As what the country believed, they first focused on making the people happy and the economy flourish rather than fully-democratizing the economy. We think this is one thing that is making China standout. The country follows the things that fit their current needs no more, no less. Thats why they do not get too tied up or too free. With regards to the other pillar of Chinas growth strategy which is the Communist Party of China or CPC, we think that it is also a very good strategy. The CPC is the control centre and substitute in the areas of politics, judiciary, law, free press and democracy. It means that all things, information, events and happenings related to the country are to be controlled and watched by the CPC. As from the article, what this ruling party could do is only make the best out of China. We think that although the party is one aspect that is most criticized by the experts; it has helped a lot in establishing the New China and its name in the world market. Although this model may have major flaws like the rising inequality between the people from urban and rural; the lack of checks on state power; and the major corruption by the officials or what we call Kleptocracy, these flaws may be solved along the way. In what we see, the more important thing is that the political system disciplined the country people to become what China is today. Many critics may have suggested loosening this political authority of China. However, if this happens, the optimal blend of liberal and authoritarian thinking that changed China may crumble down and it could do more harm than good. Finally we believed that the China model could become feasible in the long run. China focused on the economic growth by making its people more productive. In the end, we realized that this is most important.

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D. How do these policies (China) affect the Philippine Economy, particularly the business sector? China and Philippines have shared trade relationships in 1980s. This is evident that until now Chinese merchants and investors who are operating their business in the Philippines have increased in number. In fact, the owners of big companies and establishments like Shoe Mart or SM, Asia Brewery and Robinsons are Chinese nationals namely: Henry Sy, Lucio Tan and John Gokongwei respectively. This only shows how China in general has brought Philippines to prosperity. If we would base the policies under the China Model, some of these would affect our country. First, the direct investment flows between the two countries which heightened during the 1990s and have supported the Chinese government in achieving their goals which is to implement their open-door policy will be positively affected. This makes the Philippines establish significant relationship with China which is known as the country not only with the fastest growing economy but also the leading partner in the global regime. In 2002, it is said to be that Philippines earned a trade surplus for about US $36 million, the highest recorded amount since the revival of the commercial relationship with China. By this, it made China to garner the 9th place as the countrys trade partner, 10th as export market and 7th as import supplier. Seeing China as the main partner of the Philippine economy and trade industry, any alteration or improvement of their model will surely produce an impact to the latter. Second, after Chinas entry to the World Trade Organization (WTO), the Philippines hope and expect that it would liberalize its trade and regulations. In this way it could have a positive blow to the Philippine as a trade partner. Moreover, tariff rates are assumed to go down thus lowering the price and increasing the number of exported goods from the country to China. This also implies that if more goods will be exported, Philippines would have bigger market share in the economy of the latter. For example, if Philippines would export tropical fruits like mangoes at a lower tariff rate to China, these goods will be more affordable and accessible to the said consumers and in return creating a demand of that particular product. Lastly, inward and outward investment of China both positively and negatively affects the countrys economy. Inward investment allows Filipinos to establish their business in China. Outward investment could help the economy of the Philippines in a way that Chinese businessmen could establish firms in our territory thus creating opportunities for Filipino workers. However, this may bring negative impact to the Philippines; this is because Filipino business people will be overpowered by the big Chinese investors.

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IV. Conclusion While other countries believed that through Imperialism, they can gain power and can develop their nation, China is more focused on improving the current state of its economy under authoritarian rule. Furthermore, Chinese economy has slowly practiced diplomacy thus improving its trade policy and relationship with other nations. We could also say that a combination of both Reagan and Roosevelt economic policies can somewhat produce economic balance. Too much freedom or too much authority is neither good nor bad. However, it is good to see that China put into practice the blend between the two. The China Model is nowhere near perfection but what makes it appealing to other countries is that it produced a large percentage of growth in the countrys economy. The flaws of the political aspect have made the model problematic yet these flaws could still lead to improvements for the country as a whole. With regards to the relationship of the Philippines and China, conflicts have been present every now and then. These conflicts affect the relationship in terms of trade partnership, like the possibility of China implementing a selective open door policy. Potential Philippine investors and exports needed by the Chinese may also be affected. Furthermore, we all know that China is a well-known country in terms of economic development and connections, if in case, these current issues will worsen, it will leave a stain to the name of our country. In effect, it discourages other countries to establish trade relationship with ours. All in all, this economic freedom plus political repression scheme by China has caused stirs in the world of politics and economics. The question of whether it would be feasible to other countries still remains as a going concern. As a matter of fact many nations would really like to copy of that the Chinas way of improving their economic status excluding their politics system. However, as of the moment, China is doing well in implementing what we call their China Model. Finally, to attain a fully-developed and improved economy, government efforts alone may not be enough. Cooperation and hard work of the people must also be incorporated as well so as the government toil will not be wasted. However, governments unfavourable doings must also be controlled, so that in return its people will trust and collaborate with them. This is an ideal government-citizen relationship that China must achieve as well in order to progress and advance the implementation of their China Model.

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The China Model

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