Download 4 August 2015

Julia Baumgardner
4 August 2015
Penn State
Final Case Study
Building Capitalism with Socialist Characteristics
Throughout China’s history, the country has been controlled by many forces, from
internal dynasties to foreign invasions. Throughout these experiences, the country has
experienced many different types of government and shifts in economic growth. During internal
control, the country was internally focused, with minimal trade and communication, without
much external interaction. Once foreign forces, such as the Mongols and Western Europe began
to invade, China began to increase its global presence through forcibly opened ports and trading.
This invasion created a level of commotion in the country, which led to Mao Zedong rising to
power with communism. His success is mostly attributed to the people’s need to regain control
and pride after the many years of foreign occupation. The communist policies completely
restructured the society, and after about forty years, the society began to decline. Seeing this
decline, the government decided to focus on growth. Its overall goal was to increase the
country’s growth by 8% each year between 2006 and 2011 (Harvard Business School, 2006).
The plan includes focusing on addressing the account surplus and equalizing incomes between
rural and urban areas by creating five year plans that address issues related to growth. The
country, as a whole, is trying to keep socialism in many aspects except for business practices
related to growth. For China to succeed, it needs to fully commit to capitalism without creating a
hybrid between capitalism and socialism. The two philosophies are vastly different and by trying
to combine these philosophies, one is constantly contradicting the other. For example, by trying
to combine both, a society is saying that complete government control is superior at the same
time that it is saying that the market is the best method, which does not make sense. With all
aspects considered, capitalism is the direction that China should take, mainly because of its
emphasis on private business success and the free market, even though that change in philosophy
cannot happen under the current leadership because it believes in strong government control. The
pace of transition should also be hastened because of past experiences with the Eastern
European countries after the fall of communism, and the varying rates of success achieved.
Capitalism’s asset is its focus on businesses and their freedom. The success of a country’s
institutions is an indicator of overall health, meaning that when a country has many successful
businesses, the country has a friendly environment for business practices. A friendly
environment constitutes overall ease of business, such as ease of starting a business and paying
taxes. Ease of starting a business is determined by the ease of starting paperwork and removal of
entrance barriers, while a gauge of paying taxes is how easy it is to fill out the paperwork and
file. A good network of businesses is able to improve the environment and increase overall GDP
by bringing money into a country. For example, in the Ease of Business Index, which measures
the difficulty of starting and maintaining a business, the countries that ranked the best also had
the highest GDPs. A good example of the advantages of a good business environment is the
Special Economic Zones, or SEZ, set up within China. After the agreement to introduce
capitalistic aspects to the country around 1976, China set up zones that lacked regulation and had
tax breaks. The zones were opened in 1979 and once the zones advanced past their slow start,
foreign companies were able to set up businesses within the country with fewer costs, as
compared to the non-SEZ areas in the country (Harvard Business School, 2006). In the
beginning, their advantages were not aggressive enough to attract foreign companies, but once
the policies were adjusted in the late 1980’s, the zones prospered. These provisions allowed
foreign investors to control their factories, increased lease terms, and allowed companies to
exchange receipts at market rates. These adjustments encouraged companies to expand into
China, which large companies, such as Nike and Honda, did.
When considering transition success, the pace of transition is critical in the current
success of a country, based on historical experience. When studying Eastern Europe after the fall
of communism, there is a distinct pattern in the relationship between the pace of transition and
the success of the transition. The trend is that countries, such as Czech Republic and Russia, that
took the rapid pace, did marginally better than countries, such as Kazakhstan and Uzbekistan,
who opted for the gradual approach (Harvard Business School, 1999). This success is attributed
to the swiftness of the transition, which prevented other parties from interjecting. In gradual
societies, such as Hungary, the transition time is greatly hindered by political parties, such as
FIDESZ, that want to maintain a controlled society. Once a party like this one takes control, their
policies are implemented, and many contradict the policies of capitalism. In gradual countries,
other parties had the time to question practices, which led to a much slower transition, or in some
cases, reversal of capitalist policies. For example, China’s situation is very gradual, with a goal
of a combination of socialism and capitalism to increase growth. This combination of economic
philosophies is highly risky due to the fact that the policies between the philosophies are so
different. For example, socialism believes that institutions should be owned and work for the
state, while capitalism believes that institutions should be based on the market and supply and
demand. Since these two beliefs are polar opposites, trying to combine the two into a
compromise would be virtually impossible because of their differences in beliefs. This extra
aspect of a combination of the policies beyond just gradual integration further points to overall
failure, because a combination of policies is a contradiction and gradual integration is proven not
to work.
Throughout the course, the main similarity amongst successful countries that transitioned
is the freedom of doing business. In all of the cases in the course, the countries transitioned from
strict regulations and hardships to more open societies with looser regulations. In the Czech
Republic, for example, the transition was swift, and this approach helped to make the Czech
Republic the country with the highest GDP in Eastern Europe (Harvard Business School, 1999).
In contrast, Ukraine opted for the gradual approach, and it currently has the lowest GDP in
Eastern Europe. Given these past experiences, it would be in China’s best interest to transition
quickly. Within communism, all businesses are government owned, and production is not based
on demand of the society. This approach usually led to massive shortages and subpar products.
For example, once the societies became more capitalist, the production began to be driven by the
market, and the businesses became privately owned. With private enterprises, an element of
competition is introduced, and supply and demand curves begin to form. In this system, there
were fewer shortages and competitive products. Using information from past transitions, China
should move to speed up its transition to match other successful countries.
Before the course, I always believed that a market economy is more efficient, but the
examples used in the course, and the opportunity to see these economies personally, further
solidified this belief and made me realize how much worse the socialist society can be when
improperly run, and how greatly the country’s people can affect the transition. In many of these
cases, the governments are corrupt and the people in these countries are alienated by past
experiences with everything from past governments to foreign invaders. A common theme
among these countries, that I realized as a whole throughout all of the former socialist societies,
is the culture and circumstances. In many of the countries, they were just exiting a time of
hardship and turmoil. In the case of Eastern Europe, countries had been occupied by the Soviet
Union for four decades, and after protests and movements, had finally been released. This release
from control was very sudden, which led to confusion in all countries. Also in many cases, this
hardship had lasted for many years, which created a sense of nationalism among the people. This
nationalism drove people to try to create a common good, which is why politicians used
socialism as an option. Also, in many of these societies, specifically China, the people have a
mentality that they have a network of elders, starting from parents and ending at rulers. The
chain of superiors belief created by the thousands of years of dynastic rule typically leads people
to follow those people in their decisions, which makes socialism easier to implement. These
factors make capitalism hard to implement, and while I believe it is the best method for China, I
wonder how the system can be successfully implemented in a society with these deeply
entrenched beliefs. As this transition takes place, leadership must consider the present cultural
issues related to this society, and adjust its transition techniques to fit the situation.