Institutions, Growth and Imbalances
Chapter 6: Developmental imbalances and mechanisms for improving the market system
In previous chapters, we discussed China’s economy as part of its status as a large, developing country. In this chapter, we shall examine the challenges faced by its particular model of economic development. China’s strategy involves unbalanced development. The current stage of the plan involves the shift from a centralized, planned economy to a market economy. The construction of the market system has made great progress, particularly after 1994. After 1996, market competition intensified further, triggered by structural adjustments in the labor market. Waves of marketization reform were carried out by China’s strong government. The low prices and quality work of the labor force and the low RMB exchange rate established after 1995 have increased the international competitiveness of China’s products. While they have caused growth, market-oriented reforms and Chinese style federalism have also created both internal and external imbalances in the economy. Internal imbalances have widened the gaps in both income and access to public services between urban and rural areas and between social groups. These domestic imbalances have caused insufficient demand for domestic goods and services and high savings and investment rates. This creates a growth pattern dependent on investment and export. Overspeculation first became a problem in the mid-1990s.
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