The first phase of economic reforms concerned itself more with decontrolling agriculture, bringing in foreign investment, and allowing entrepreneurs to start businesses. These economic reforms were a great start but most industries still remained state owned and inefficient. The second phase of economic reforms focused heavily on prevarication, getting rid of policies that hampered trade, and the breaking of many state owned monopolies. These are Just short overviews of the reforms, and I will get more into the specific details of each phase of the reforms and how they affected economic growth in the next paragraphs.
The first phase of economic reforms that lasted from 1978 to 1992 introduced any changes to the Chinese economy. One of the most important policies of this phase of the economic reforms is the creation of the dual track system. The dual track system refers to "the coexistence of a traditional plan and a market channel for the allocation of a given good. " (Naught, 91). The dual track system created a two price system for most goods, there was the planned price set by the state, and then there was a market price for that same good. In this system the planned price set by the state was typically lower than the market price.
The dual track system however id not create a two ownership system, the big state owned enterprises still had monopolies on most industries and were assigned a compulsory plan by the planning committee for a specific output level. However thanks to the dual track system the state owned firms were able to produce above the level set by the planning committee and sell those goods on the market. This started to introduce all firms to the market and allowed for state firms to work with onstage firms, which gave them valuable flexibility and started to adapt them to market processes.
This as not sufficient to propel China towards a market economy but it was a great start towards making firms in China more efficient and better equipped to deal with market demand. Another very important change during the first phase of economic reforms was History of Chinese Economic Growth By microscopy in transforming the Chinese economy from a planned economy towards a market economy. TV's were still public, collectively owned enterprises, but they weren't state run and were able to challenge and even break the monopolies held by the public state run enterprises.
Overall TV's allowed for more control by local and provincial governments and allowed them to operate and compete based on free market principles and not based on state planning. From 1978 to 2003, the number of TV's grew by 20% annually, and by 2003 there were a total of 21. 85 million TV's that employed 135 million people. TV's mainly showed up in rural areas and were used by farmers to set up collective farms. TV's had a great effect on rural communities by "increased rural incomes, absorbed rural labor released from farms, and helped narrow the urban-rural gap. Naught, 271). TV's helped rural industries grow at a very rapid pace, and that growth played a very important role in the transformation of the Chinese economy. TV's became strong competitors to state owned enterprises, they were able to drive price relationships in line with underlying costs, thus taking away much of the state owned enterprises profits. Because of this the state owned enterprises were forced to adept by creating new incentive programs and greatly improving efficiency Just to survive.
This served to make the state owned enterprises deter run and a lot more efficient, which in turn helped fuel the growth that China experienced during that period. Overall the first phase of the economic reforms was successful, but it did also come under scrutiny from conservatives that were opposed to these reforms. That scrutiny did have some merits but in retrospect the reforms did work and had a great impact on the Chinese economy and its growth. The reforms helped reduce the state's monopoly on many industries led to a rapid entry of new firms.
Entry of new firms and adoption of market prices greatly enhanced competition. Because of the increased competition, the government was forced to experiment with better incentives and different ways of running their state owned enterprises. This greatly improved the performance of state owned enterprises and was a huge factor that contributed to the economic growth that China experienced during that time. The second phase of economic reform, which has lasted from 1993 through the present, had an even greater impact on the transformation of the Chinese economy and the huge growth that it experienced.
A very important part of the second phase of economic reforms were the banking reforms. The People's Bank of China (BBC) was established as the central bank in 1983, but at that time it wasn't very effective. It wasn't until 1998 that the BBC was transformed into a true central bank that had a powerful and positive impact on the Chinese economy. In 1998 the banks whole organizational structure was changed, all provincial level branches were closed and instead nine regional branches were set up.
The PBS was also given a renewed mandate to conduct monetary policy, this led to the BBC playing a much more active role determining and implementing monetary policy. The BBC also got rid of soft budget constraints in favor of hard budget constraint. This meant that state commercial banks no longer had access to easy money, they could no longer afford to perform poorly. The state commercial banks in turn started to pass tougher standards onto their clients which helped the state commercial banks deal with their asset management companies were established in 1999.
They took over many of the nonperforming loans of the big four state commercial banks and liquidated them for as much value as they can get. In 2003 the supervisory functions of the BBC were even to the newly created China Bank Regulatory Commission, this led to even tougher standards and finally the state commercial banks were beginning to get a handle on their issues with nonperforming loans. The percentage of nonperforming loans to total loans was 29. 8% in the late 2001, but by 2005 it was under 10%, and in 2013 it was 1% (World Bank).
Getting the nonperformance loans down to a low level was key in stabilizing the banking system and fueling the economic growth. Another very important aspect of the second phase of economic reforms was the process of prevarication. The Chinese government was never big on the idea of prevarication, but to increase competition and attract foreign investors' prevarication in the form of management buyouts became common in the mid ass's. Both TV's and Goes had to go through the process of prevarication which led to the rise of private businesses.
By 2004 the urban private sector employed almost twice as many workers as the state sector, the private sector employed roughly 55 million, while Goes employed roughly 30 million workers (Naught, 106). While this process of prevarication was both necessary and successful, it didn't come without its problems. Due to the increased competition many failing Goes closed and those that didn't had to cut costs by laying off workers to remain competitive, this led to many state enterprise workers losing their Jobs and social standing.
But despite these negative effects, the process of prevarication continued to increase competition and the efficiency of firms which helped to keep the Chinese economic growth going. The last major aspect of the second phase of economic reform that I will address is trade reform. The goal of the trade reforms was eventual membership in the World Trade Organization (WTFO). In order to Join the WTFO, China had to devalue its overvalued currency and change its foreign trade system. The devaluation of the Yuan was a slow process, in 1980 the Yuan was 1. 5 to the dollar, by 1986 the value of the Yuan declined to about 3. To the dollar (Naught, 383). This realistic lower currency value made it more profitable export and served to increase trade. Another big part of the trade reform were the changes made to the foreign trade system. Before the reforms only twelve national foreign trade companies had monopolies on all imports and exports. Throughout the reforms the number of companies that were able to participate in foreign trade expanded drastically. As the number of these foreign trade companies grew so did the competition, the foreign trade companies became more efficient and exports increased.
To further promote trade China also began to lower their tariff rate. In 1992 the trade weighted mean tariff was 32% (Naught, 385), but by 2000 the tariff rate was 14. 6% (World Bank). This also helped the fuel Chinese trade, and in 2001 China was allowed to Join the WTFO. After Joining the WTFO, China continued to decrease their tariff rate and by 2011 the tariff rate was . 0%. These lower tariffs and membership in the WTFO have helped China become the number one exporter in the world and had a massive impact on Chinese economic growth.