The next fundamental part of economics is the three main questions.
1. What to produce?
2. How to produce?
3. What to produce?
Since resources are scarce these decisions can be made by the influence of the demand and supply curve of the free market or from a planned economy where the government chooses what to produce, how to produce and for whom to produce for.
With the end of communism in 1991 following the collapse of Soviet Union, the economies of the former Soviet satellites moved towards free market. By then, China has already been experiencing tremendous economic growth and development for a decade. Would these former Soviet satellite states follow China’s path to wealth? What were the transitional problems faced by China then in the 1980s?
One problem experienced by China during her transition to free market was the problem of structural imbalance. Non-state enterprises in China were more productive than State Owned Enterprises (SOEs). One reason was that the non-state enterprises had to be competitive in order to survive. The workers in these enterprises had to be productive; otherwise, they would be fired, unlike the employees in the SOEs. Thus, non-state enterprises exerted a pressure on the SOEs. This led to reforms such as tax reforms, establishment of contract responsibility, and introduction of modern corporate system in the SOEs. The SOEs also became more competitive and productive in the long term.
The price mechanism became the main tool for allocation of resources. The development of private enterprises rectifies the misallocation of resources. They had to pay market prices for their inputs; their products were sold at market prices. This induced the non-private owned enterprises to adopt more labour-intensive technology and to concentrate on labour-intensive small industries as there was abundant cheap labour. This also led to the migration of rural workers to the cities in search of jobs in the factories. This was to result in a widening income gap between the rural and urban regions. The educated and skilled workers tended to earn more than their less educated and unskilled counterparts. Thus, whilst the big coastal cities were experiencing rapid economic growth, the rural areas were stymied in poverty. However, this does not mean that there was an absence of poverty in the urban areas. Indeed, the urban areas were also full of poverty. Hence, the Chinese government had to fight poverty on two fronts.
In my opinion, knowing the concepts of economics is a fundamental basic which is needed in our daily lives. It helps us make decisions whether big or small. A concept like opportunity cost helps us make clearer decisions on what to purchase. Economics also helps us to understand better how the world works around us.
Nicholas Ang
5W
Wow, you must have done extensive reading up on China's transition to the free market economy! Again we face trade offs - do we choose an economy where there is great wealth, those large inequalities, or a situation where most people are at the same stage of affluence, or lack of - that of poverty?
ReplyDeletePersonally I would choose an economy where there is great wealth with those large inequalities. Granted the fact that it is economic growth which results in widening income inequality, where the benefits of economic growth lead to the rich getting richer and poor getting poorer. An example is Singapore where rising economic growth in the last one decade has widened the income gap. As economic growth has given the Singapore government the financial resources to redistribute income from the rich to the poor through subsidies, this has enabled the low income group to have a better life. Unlike living in poverty as in reality where there is poverty, there is also never equality. Countries such as Indonesia, African countries, Myanmar testify to this.
ReplyDeleteNicholas Ang 5W
Interesting piece of work. Economic concepts are nicely illustrated within the first few paragraphs.
ReplyDeleteIn addition to what Nicholas have blogged; China undergoing transition. As what he had said, the rich becomes richer while the poor becomes poorer. Small industries cannot survive in the China's economy since it becomes very competitive. Also, the country tend to become super chaotic during transition as there are many illegal dealings such as raising the price of certain goods in the black market.
However, I agree with what Nick had said that economy is the "social science which studies human behaviors" and not just in monetary form.
Emily Yiu