COMMUNISM AND CHINA by Helena Gostelow

This week in Economics Society, Helena focused on the emerging economy of China, providing a glimpse of its future seen from an economic and political perspective.

The themes that Helena addressed were the following:

• What is Communism?

• Communism or Capitalism?

• How is China likely to change in the future?

• How does this affect us?

Communism

Communism is defined as “a system of social organisation based on the holding of all property in common, actual ownership being ascribed to the community as a whole or to the state.” Although this definition gives us an impression of what Communism involves, there are many other dimensions to it.

Merits of Communism

The Soviet Union’s collapse in 1991 was taken to be a signal that Communism as a regime was inevitably doomed to failure. Helena pointed out that despite various criticisms, Communism does have some benefits. The following were proposed as the merits of Communism relative to Capitalism from an economic perspective:

·Unity and control over the economy– When the governing body can ensure that the population is employed only in jobs the government deems beneficial for the economy, and they have full control of production (GDP), the economy can act as a powerful united tool. On the contrary, in a capitalist economy, the price mechanism leads individuals to make decisions based primarily on personal gain, and this often results in one person’s gain and another person’s loss resulting in no net gain. An illustration of this is the market with externalities, whereby the market equilibrium is not socially optimal. A firm may gain profit through manufacturing, but the pollution it causes has a negative effect on the population that lives nearby and that do not benefit from the profit that the firm experiences.

·Fluctuations in prices– when prices do not act as a reliable indication of the actual value of a good. The housing bubble, especially in the United States, saw house prices rise as people were fuelled by deceptive, sub-prime mortgage packages increasing the demand for houses. As the economy started to weaken and borrowers were unable to keep up with mortgage payments, foreclosures increased and house values plummeted, a self-enforcing spiral that led to long-term stagnation in growth and a double-dip recession. Other examples are the stock market bubble of 1920-29 and the dot-com bubble of 1995-2000. Clearly, these bubbles are a recurring issue in capitalist economies that have continued to cause damage over a long period of time.

·Inequality in capitalist societies– Due to globalisation and increased interdependence, economic stability will become even more sought after. A factor that can disrupt this is inequality. On the surface, it may appear a necessary evil in order for enabling economic growth, but inequality means that the wealthiest hold a high proportion of a country’s overall wealth. As the rich are more likely to save a large percentage of their wealth, the economy suffers from a loss of money from the circular flow. This stifles economic growth and reduces the extent to which the economy can enjoy multiplier effects. High inequality is shown to be closely correlated to a number of damaging factors such as child wellbeing (although this does not show causality).

China’s path…

After discussing some aspects of Communism, Helena moved onto discuss the Chinese economy, a Communist country that has opened to trade.

Putting in perspective the growth of the Chinese economy, Helena brought forward the following ideas, that in her opinion, we will witness China adopting:

·Move towards exporting services– When the West experienced a recession in 2008, the Chinese government reacted by initiating a stimulus package of $586 billion. This allowed the domestic market to avoid the crash, but the economy was still heavily dependent on cheap exports to the West. A drop in this demand is indicating to accelerate the change in manufacturing, from cheap, low-tech goods to the more expensive and technological such that the demand for its exports is inelastic. The government is keen to encourage this change, and many incentives exist for increasing research and development, innovation and high-skill manufacturing.

·Boosting domestic demand– Since exports comprise a significant proportion of China’s current GDP, the economy is vulnerable to recessions that the importing countries are facing. To avoid this, the economy will have to develop its domestic demand which still remains subdued.

Implications of China’s growth on the world:

The following were proposed as some of the implications China’s growth will have globally:

·Shift of political power– As the Chinese economy continues to grow, global dominance is likely to shift from the USA to China; some predictions forecast that Chinese GDP will overtake that of the US as early as 2016. This is likely to have a considerable influence on summits such as the Kyoto protocol, an international agreement on climate change prevention. Although China is currently signed up to the treaty, its compliance is by no means is a given – its global dominance is likely to increase the extent to which the Chinese governments can influence decisions in their favour.

·Increased competition– As China grows to have a skilled labour force, many of the effects noticed by us are likely to be due to its vast population. This can be accredited to a huge improvement in the education system, which prepares individuals for international work. These individuals will undoubtedly be competing with us for jobs, as they are already forming significant competition for higher education.

·Issue of sustainability– China will require an increasing quantity of natural resources to enable its growth and fuelling its domestic demand. This will not only create an upward pressure on the price of the natural resources in the short run, but also leads to questions about sustainability in the long run as many of the resources used will be non-renewable and finite.

A Hypothesis

To finish with, China is developing at an incredibly rapid rate, and the underlying assumption of western economists has been that, as China develops further, it will westernise, turning towards becoming a democratic and capitalist society. Helena indicated that this may not necessarily be the case, and we may see a dominant communist power completely changing the global political sphere in the future, given the economic success it has had so far.

The talk ended with several questions ranging from hypothesising whether the path of the African economies will be similar to that of China to comparing efficiency and equity in Communist and Capitalist Economies. Any questions and discussions on this topic are welcomed. Thank you to all those who attended.

Next week in Economics Society, we have the opportunity to listen to Professor Ian Goldin, the Director of Oxford Martin School and Vice President of the World Bank (2003-06), on the topic of Globalisation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s