Supply-Side Policy: A case study of China’s miraculous growth in the last three decades

Objective: The aim of this activity is to deepen students’ understanding of supply-side policies through the context of China’s economic development since 2000. By examining China’s blend of market-based and interventionist strategies, students will learn to differentiate between these two approaches and analyse their impacts on a nation’s economy. The activity will also enhance students’ skills in applying economic theories to real-world scenarios, using tools such as AS/AD diagrams, and developing critical evaluation of policy effectiveness in fostering long-term economic growth and development.

Background

Since 2000, China has implemented various supply-side policies to stimulate economic growth and development. These policies aim to enhance the productive capacity of the economy by increasing the quality and quantity of factors of production. Supply-side policies focus on long-term strategies that contribute to the real national output growth, ensuring sustainable economic development without the risk of inflation.

When implementing supply-side policy, governments choose between either market-based policies, interventionist policies, or a combination of both.

1. Market-Based Policies: These policies focus on reducing government intervention and allowing market forces to operate with minimal interference. They emphasize deregulation, reducing barriers to trade and investment, and promoting competition. This approach believes that efficient markets lead to optimal allocation of resources, fostering innovation and growth.
2. Interventionist Policies: These involve direct government intervention in the economy. The government actively shapes market outcomes through policies such as subsidies, state control over key industries, and public spending to stimulate certain sectors. This approach is often adopted to address market failures, promote social welfare, and achieve specific economic objectives, like industrialization or technological advancement

Market-Based and Interventionist Supply-Side Policies in China

1. Market-Based Policies:
   • Deregulation and Privatization: China has gradually reduced government controls in various sectors, allowing more private sector participation. This move towards a more market-oriented economy has boosted competition and efficiency.
   • Labour Market Reforms: Efforts to make the labor market more flexible, such as modifying labor laws and adjusting unemployment benefits, have been key. This includes reducing the influence of state-owned enterprises in the labor market.
   • Trade Liberalization: China’s entry into the World Trade Organization in 2001 is a prime example of its commitment to reducing trade barriers, fostering international trade, and increasing its export potential.
2. Interventionist Policies:
   • Education and Training: Investment in human capital through education and training has been a priority. This increases labor productivity and mobility, helping workers adapt to changing industrial needs.
   • Healthcare Improvement: Enhancing the healthcare system improves labor productivity by reducing time lost to ill health.
   • Research and Development (R&D): Focus on R&D, especially in technology, has been instrumental in improving efficiency and productivity in various sectors.
   • Infrastructure Development: Substantial investment in infrastructure like transportation, power supply, and telecommunications has facilitated more efficient and productive output.
   • Industrial Policies: Targeting key industries for development, particularly in manufacturing, through providing subsidies and tax cuts.