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The Economics of China and Singapore

Abstract

The main focus of this research was on the study and comparison of two economies – in China and Singapore. To have a deep research there were used such reputable sources as Singapore GovernmentThe World Bank2013 Index of Economic Freedom, and International Business Times. The research included the analysis of the economic development in two countries, especially their background, past economic development, recent data, and current development. There was found the main reason for economic prosperity in China and Singapore which is industrialization. There was also made an observation that the economies of these two countries had their own ways of success and prosperity. China as a socialistic state had to implement reforms and restructure the whole economic system while Singapore did not have a developed economy and had less hindrance to start. The dynamic of economic development was quite similar in both countries. At the same time, when the process of global integration of these economies has taken place, they were more dependent upon the economies of other countries.

Introduction

China and Singapore are the countries situated in East Asia and are, both, regarded as economically strong. However, their history of economic development was different and their successful progress was conditioned by different reasons.

The rise of China as an economic power is a very impressive story in modern times. The country was ruled by the totalitarian government and the Chinese people suffered very badly. However, when the economic system of their country changed, the Chinese experienced considerable relief and took an opportunity of enjoying the fruits of capitalism. Though some calumniators, both in China and outside the country, would disagree that capitalism brought happiness to the people of China, many Chinese moved up from abject poverty to relative prosperity.

As for Singapore, its economic progress started much earlier. Though the country was not under communism, it was controlled by Britain after World War II for about two decades and, when it merged to Malaysia. The union with Malaysia did not last long. Finally, Singapore got its independence in 1965, and soon an industrial revolution took place. After economic reforms and getting involved in international trade, Singapore has become one of the most prosperous countries in the world.

In this research, there will be compared to the economies of China and Singapore. The research will discuss such issues as economic background, economic systems, and freedom of the countries, including the recent developments.

Background and Past Development

The economic reforms in China were initiated in 1978. The Chinese government, who ran its economy on the principles of central planning, changed it for a market-based economy. This policy caused considerable growth in industrial development which resulted in GDP (Gross Domestic Product) growth as well. GDP reached about 10 percent a year. It happened due to the policy of liberalization in the late 1970s and the early 80s, which involved the integration of some parts of the Chinese economy into the trading and financial world systems. However, the formal admission in the World Trade Organization took place only in 2001 (2013 Index of Economic Freedom, 2013).

It is interesting to observe the progress of the increase of Gross Domestic Product (1 unit is 100 million yuan). China through a Lens points out the following numbers:

1978 – 3,624.1

1985 – 8,964.4

1990 – 18,547.9

1995 – 58,478.1

2000 – 89.403.6

2001 – 95,933.0. (“Economic system,” n.d.)

The rapid increase of GDP helped more than 500 million people make the transition from poverty to a decent lifestyle. At the same time, not everyone managed to make such progress.

According to the statistics, in 2012 there were about 128 million people who remained below the national poverty level. Their income was equal to 1.8 U.S. dollars a day only (The World Bank, n.d.).

One may think that the economic reform in China was only connected with industrialization. However, it was not so. The reform was initiated first in rural areas. Farmers received certain freedom in doing their activity. They were allowed to use the land, plan to farm on their own, and dispose of their products as they wished. Any monopoly of the government regarding purchase and marketing was removed. The prices of most products were not controlled by the government anymore. What is more, farmers were allowed to diversify their business and organize their enterprises in towns and settlements. Such a policy contributed significantly to the Chinese economy.

Only in 1984, the reform provided for the economic restructuring moved from the countryside to the cities. It was successful, and in 1992, the government of China developed a policy that allowed establishing a market economy. Though the public sector of the Chinese economy was still dominant, it encouraged the development of non-public economic elements. To have a market economy unified, it was important to make links between rural markets and those that were in cities, between domestic markets and those abroad. According to China through a Lens,

The function of managing the economy by the government should be changed so as to establish a complete macro-control system mainly by indirect means. A distribution system in which distribution according to work is dominant while giving priority to the efficiency with due consideration to fairness should be established. This system will encourage some people and some places to become rich first, and then they may help other people and places to become rich too. A social security system, suited to the Chinese situation, for both rural and urban residents shall be worked out so as to promote overall economic development and ensure social stability. (“Economic system,” n.d.)

In 1997, it was stressed by the government of China that the diversified sectors of the economy were very significant for the economy of China. Especially, there was encouraged a yield for the production elements that had a relation to capital and technology. That would enable faster economic restructuring.

In 2001, various areas of the economy were reformed without serious difficulties. The achievements of the reform were very high, and the market economy of the socialistic state was being established in China with positive expectations. The problems regarding resource allocation were also solved. The economy made a transition from the extensive mode of growth to the intensive one. The expectations for the successful socialist market economy were very high (“Economic system,” n.d.).

In Singapore, the economic development began much earlier than in China. Since the country was announced independent in 1965, it took its course on industrialization, a big part of which was manufacturing. Such a policy brought its fruits, and soon Singapore developed from a country with a low living standard to a country with a high cost of living. The same as China, GDP has grown considerably in a short period of time. During the first twenty-five years, it maintained at a level of approximately 9.2 percent, and then, after some decrease, it stabilized with an average of 7.7 percent annually. During these periods of time, GDP per capita had an increase of 5.4 percent and 7.2 percent accordingly.

The nation of Singapore had considerable benefits of such progress. In the early 1970s, in Singapore, there was full employment. Of course, considering a significantly smaller population than in China, it was easier to achieve such a result. Unlike China, where the reform greatly influenced agriculture and only later the industrial sphere of the economy, Singapore enjoyed mostly the industrial development. The Economic Development Board was very busy with marketing Singapore providing the places for building the factories in advance. The workforce was also trained in advance so that it was available on demand.

In the course of time, manufacturing developed and became sophisticated. The Singapore Government (2012) in its article “History” put it this way, “Manufacturing…included computer parts, peripherals, software packages, and silicon wafers. This, in turn, led to new investments particularly in the electronics sector and product diversification, which greatly enhanced export performance in spite of a global recession.”

A decade later, in the 1980s, Singapore reached the level of economic development equal to such Asian countries like South Korea, Taiwan, and Hong Kong. The Economic Development Board began to co-operate with Japan, Germany, and France and established jointly institutions of technology. That would allow meeting the needs of high-technology industries. Those institutions along with the Skills Development Fund provided the citizens of Singapore with the training to get the necessary qualification for the jobs in sectors of electronics and engineering. There was also set up the Science Park near the National University to encourage R&D activities.

However, when the global recession took place, that the economic field experienced serious difficulties. The Singapore Government explained it in the following way,

Eventually, due to the government’s adoption of a high-wage policy to accelerate the move away from labor-intensive industries and the attraction to high-technology industries, wage bills swelled as the world slipped into an economic slowdown and Singapore slid into a recession. This lesson was learned and there was introduced a flexible wage system (Singapore Government, 2013).

In 1990s the technology continued to develop, and the company promoted the value of technology along with intensifying its use. At the same time, the service sector began to greatly contribute to economic growth. The Economic Development Board began to focus more on the key industries of Singapore, such as engineering, chemicals, and electronics. Consequently, there were developed biomedical sciences. This field included the medical technology and pharmaceutical biotechnology. The latter developments enabled the structure of the economy to be more diversified and resulted in new businesses (Singapore Government, 2013).

The technology continued to develop in Singapore. According to Singapore Government (2012), “In 2006, the government set aside more than $13 billion to promote R&D (GERD) from 2.25 percent to 3 percent of gross domestic product (GDP) within that period.” There was formed The National Research Foundation for coordination and implementation of the research to develop water technologies and digital media. There was also introduced a policy concerning Intellectual Property protection, which resulted in a high ranking in Asia (Singapore Government, 2013). One can make the conclusion that from the very beginning, the key to successful economic growth was industrialization.

Recent Data

In recent years, China demonstrated high and stable growth in its economy. Having a population of around 1.3 billion people, China achieved a high GDP which estimated 11.3 trillion U.S. dollars. The growth indicated 9.2 percent and a 5-year compound annual growth was about 10.5 percent. Growth per capita was also quite considerable – 8,382 U.S. dollars as well as FDI Inflow -124.0 U.S. billion dollars. However, unemployment and inflation were not eliminated yet showing 6.5 percent and 5.4 percent accordingly. As for tax, the income tax rate and corporate tax rate are 45 percent and 25 percent. According to statistics of 2013 Index of Economic Freedom (2013),

The overall tax burden is equal to 18.2 percent of total domestic income. Government spending amounts to 23.6 percent of GDP. Public debt has decreased, but large amounts of debt are held in off-budget obligations. Slower growth may undermine the fiscal policy.

It is quite difficult to judge on regulatory efficiency as the regulatory framework is complex and arbitrary. 2013 Index of Economic Freedom noted that “Completing licensing requirements costs over three times the level of average annual income” (2013). The government still tightly controls the labor regime as well as the prices on energy and raw materials. As the consumer price inflation was declared in 2012, the government got room to implement additional incentive measures.

As for open markets, the trade tariff is about 4 percent. However, there are also non-tariff barriers that increase the cost of a trade. There is a lack of transparency in the investment regime the same as with the regulatory efficiency. The government of China keeps controlling the financial system to manage the whole economy of the country. Financial institutions are owned by the state and are lend according to the needs and directives of the state. The priorities are given largely to the state enterprises (2013 Index Economic Freedom, 2013).

The indexes of Singapore’s economic development look more modest than of China. However, considering significantly less number of the population in Singapore, its data still marks the better shape of the economy. In Singapore, there live and work at about 5.3 million people while in China – 1.3 billion. The Gross Domestic Product of Singapore is 314.9 billion, which is approximately 33 times less than in China. Economic growth is nearly two times less – 4.9 percent. Approximately the same difference in 5-year compound annual growth – 5.7 percent. However, GDP per capita in Singapore is significantly higher and reaches 59,711 U.S. dollars. The situation with employment is also substantially better in this country. The unemployment level is only 2.0 percent. The inflation rate in Singapore is about the same as in China – 5.2 percent. The FDI Inflow is approximately two times less – 64.0 billion U.S. dollars.

There is a significant difference in the top income tax rate and corporate tax rate. While in China As stated above in China, the rates are 45 percent and 25 percent; in Singapore, these indexes are 20 percent and 17 percent accordingly. 2013 Index of Economic Freedom also gives some other interesting data regarding economic development in Singapore,

The overall tax burden equals about 14.1 percent of total domestic income. Government spending is equivalent to 17 percent of GDP. Structural budget surpluses have sustained high debt levels near 100 percent of GDP. The state remains heavily involved in the economy through government-linked companies. (2013)

The regulatory efficiency in Singapore, in comparison with China, is quite simple and transparent. There is no minimum capital requirement for starting a business. The whole procedure to begin a business takes three days. There is no such notion as a minimum wage, but only wage adjustments. National Wage Council gives the necessary guidance on this issue. Inflation is controlled effectively, though there are some external challenges. The enterprises co-operate with the state, and thus, the prices can be influenced by the state as the economic necessity requires.

Unlike China, the trade regime of Singapore is transparent and competitive. Tariffs are not applied to imports. There is no priority over the domestic business as both domestic and foreign businesses are given the same legal conditions. However, there are some limitations on foreign investment in service industries. Singapore is a financial center of the world; its financial sector is efficient and very competitive. The government of Singapore has a loyal policy on foreign banking. Out of 120 commercial banks, 100 are from overseas (2013 Index Economic Freedom, 2013).

Current Developments

Currently, the economy of China shows the signs of slowing down. According to China’s Cabinet, economic growth decreased to 7.6 percent. This is the lowest index for the last 14 years. The Cabinet indicates that the current model that relies largely on exports and investments is exhausted and soon will not maintain growth for a long time. The dynamic of the last three years is the following 2011 – 9.3 percent, 2012 – 7.7 percent, and 2013 – 7.6 percent (International Business Times, 2013). The government expected 7.5 percent of the growth at the beginning of this year. The tendency is that the economy grows in China is going to decline. The 12th five-year plan that is between 2011 and 2015 expects an annual growth at 7 percent. Shaoshi Xu, the minister in the Cabinet who is in charge of planning, gave the following comment on December 26, 2013, “We cannot deny a downward pressure on economic growth. The traditional comparative advantage is weakening, while it will take time for us to build a new advantage” (International Business Times, 2013).

The greatest challenges of the Chinese economy are the local government debts with their increasing risks and the problems in the financial sector caused by government investment in the industrial undertakings.

At the end of the year 2013, there was held an annual conference where the Cabinet set the following 6 targets for the coming year

1. Ensure stable supply and quality of agricultural products and food safety; 2. Speed up industrial structural adjustment and resolve overcapacity problems; 3. Prevent risks from local government debt; 4. Push for coordinative regional developments; 5. Raise the average living standard and support affordable housing problems; and 6. Further, open up the economy, push ahead with free trade zone negotiations. (International Business Times, 2013)

Singapore’s economy has also encountered serious difficulties this year. The contraction of the economy was registered on a quarter annualized bases and made 2.7 percent in the last quarter of the year 2013. In comparison with the previous quarter that was a reversal from 2.2 percent of the expansion. The contraction affected the sector of manufacturing at a rate of 4.0 percent. In the previous quarter, there was an observed growth of 1.2 percent. Other sectors were also affected such as construction with the contraction of 6.9 percent from 1.7 percent of growth. The services that produced industries had a contraction of 1.7 percent in contrast to 3.0 percent of the growth in the previous quarter.

The index of economic growth decreased to 4.4 percent. Overall, the economy in 2013 has grown by 3.7 percent, which was in line with the expectations of MTI that made a forecast of 3.5-4.0 percent. However, in comparison with 2012 – 1.3 percent, it is an improvement (Trading Economics, 2013).

Gross Domestic Product data is very important as Singapore runs a very small open economy and so that data can serve as a barometer of global dynamics. The data demonstrated the slowdown of the growth in all sectors, including manufacturing (CNBC, 2014). This means that there is a tendency for an economic recession or even crisis worldwide. It will affect both China and Singapore.

Conclusion

In conclusion, the economies of China and Singapore experienced dramatic growth due to the industrial revolution in these countries. China began its reform with the restructuring of the socialistic economy, first in agriculture allowing the farmers more freedom for enterprise, and then, the industrial progress followed. As for Singapore, the focus was solely on the industry, especially manufacturing. The services also played their role, but their considerable contribution to the economy was in 1990. The economic growth had a similar dynamic – usually, it was maintained at a level of nearly 10 percent. However, their growth could decline in times of global recession, which confirms the integrative processes that take place in the economies of China and Singapore. Though the economies of the countries are seemingly strong, they both are very dependent on the global economic processes.

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