The Political Economy of Reform in China

1
The Political Economy of Reform in China

• Douglas J. Young
• October 13, 2006

2
Ancient China

• Domesticated Rice and Millet
• Pioneered Irrigation, Animal Fertilizers, Crop
  Rotation
• Invented Cast Iron Moldboard Plow
• Invented Printing and Paper
• Invented Compass, Gunpowder
• Invented Stern Post Rudder

3
7th 14th Century

• Dominant Civilization of East Asia
• Culture spread to Japan, Korea, Tibet, Vietnam
• Standard of Living to Europe
• But No Renaissance
• China Closed Itself Off from Western Ideas and
  Technology

4
19th Century

• Corrupt, Ineffective, Feudal Regime
• Domestic Chaos, Rival Warlords
• Dominated by Technologically Superior Western
  Powers

5
20th Century First Half

• Last Emperor Falls 1911
• Civil War Nationalists v. Communists
• Occupation by Japan
• 1949 Communists Win Nationalists Flee to Taiwan

6
Initial Communist Policy

• Land Redistribution
• Literacy Campaign
• Barefoot Doctors

7
Survival to Age 5
8
Central Planning

• Heavy Industry
• State Owned Enterprises
• Result Rapid Expansion
• Large Collective Farms

9
Central Planning (2)

• State Assigned People to Jobs (No Labor Market)
• State Fixed Wages and Prices
• Consumption of Food, Clothing, etc. Rationed
• State Owned all Housing
• gt Few Economic Choices

10
Central Planning (3)

• Rewards Based on Meeting (Exceeding) Production
  Quotas
• Little Reward for Innovation or Quality
  Improvement

11
The 100 Flowers Campaign

• Mao Feared that Communist Party Members were
  Losing Revolutionary Fervor Becoming Bureaucrats
• Mao Encouraged Criticism of the Party and its
  Policies
• Mao Purged his Critics
• Few Criticized Mao Again

12
Great Leap Forward (1958)

• Millions of Peasants and City Workers Made Steel
  in Backyard Furnaces
• Results
• Steel Production gt England
• Massive Economic Dislocation
• Denude Hillsides of Trees, Burn Furniture, Doors
  for Fuel
• Melt Down (Steel) Cooking Pots Ag Implements to
  Make (Steel) Quota

"Take steel as the key link, leap forward in all
fields".
13
Peoples Communes

• All Land Equipment Owned by Collectives
• Massive Planting of Grains
• 1958 Huge Wheat Crop
• Waste
• Unharvested (No Labor)
• No Storage/Transport
• Report to Mao Everything is Going Well

14
Famine 1958 - 61

• Adverse Weather
• Communes were Required to Provide Grain to the
  Cities
• 30 Million People Starved to Death in Rural Areas
• China Continued to Export Grain, as Mao Sought to
  Maintain Face

15
Life Expectancy China
16
Under 5 Mortality China
17
Amartya SenNobel Laureate in Economics, 1998

• no substantial famine has ever occurred in any
  independent and democratic country with a
  relatively free press
• It is precisely this lack of challenge that
  allowed the deeply defective policies in China
  to continue even though they were killing
  millions each year. Democracy as a Universal
  Value, J. of Democracy, 1999

18
The Great Proletarian Cultural Revolution 1966-76

• "Shatter the old world / Establish a new world."
  Classical example of the Red art from the early
  Cultural Revolution. A worker (or possibly Red
  Guard) crushes the crucifix, Buddha and classical
  Chinese texts with his hammer 1967

19
Cultural Revolution1966-76

• Maos Power Threatened by Failure of Great Leap
  Forward
• Closed Schools Sent Teachers to Countryside to
  Learn from Peasants
• Red Brigades Terrorized Opponents
• Social Chaos 500,000 Died
• Near Economic Collapse

20
End of An Era

• Mao Dies 1976
• Gang of Four Tried for Crimes
• Deng Xiaoping New Leader
• Visits Poor Taiwan, HK
• Reform and Opening

21
Real GDP/Capita
22
Chinas Progress
23
Chinas Growth Since 1978

• Income/Capita Increased 6 Fold
• Worlds 2nd Largest Economy (PPP)
• 4th Largest Trading Nation (Exports)
• Largest Recipient of FDI in the Developing World
• Never Before in History Have So Many Millions of
  People Been Lifted Out of Poverty in Such a Short
  Time

24
Household Responsibility System

• Farmers allocated individual plots of land to
  work (not ownership)
• Farmers decide what, how to plant
• Sell quota to state keep/sell the rest
• gt Incentives to increase output and reduce costs
• Output and Rural incomes increased
• Generated surplus (gt subsistence) to finance
  Investment

25
Township Village Enterprises

• Local Governments/Cooperatives Produce for Market
• Local Decision-Making
• Local Finance
• Keep (Most of) the Profits
• Before State Takes All Profits
• After State Taxes Profits

26
Special Economic Zones

• Encourage Foreign Investment
• Capital Inflows
• Technology
• Knowledge of Rest of World (Chinese Diaspora)
• Encourage Production for Export
• Contrast with Self-Reliance

27
Its Glorious to be Rich
28
Lessons

• Saving, Investment, and Technology are
  Important Solow-Swan
• Economic Institutions Create Incentives (or
  Disincentives) for
• Savings, Investment, and Innovation
• Work, Output, Productivity
• Efficient Resource Utilization

29
Lessons - II

• Economic Development is Founded on Both
• Market Institutions (Incentives)
• Stable Political Legal Framework
• Various Public-Private Combinations
• Deng Black Cat White Cat

30
K/L (or L over K?)
31
Drying Wheat
32
China is Still a Developing Country

• Lower K/L than West
• Lower Education than West
• gt China has Comparative Advantage in Products
  that Intensively Utilize Low-Skill Labor
  (e.g.Textiles, Plastic Cups)

33
Chinas Growth

• Will Slow as Western Income Levels are Approached
• Currently Catching Up in Capital, Technology,
  Education
• Grown so Fast because
• So Poor to Begin With
• Policies were so Bad
• To Chinas Credit Many Stagnate

34
Is China an Economic Threat to the US?

• Is Germany a Threat?
• Most of the Benefits and Costs of Development Are
  Domestic
• Increases in Chinese Productivity Mainly Benefit
  China
• Increases in Chinese Productivity do NOT Make US
  any Less Productive

35
Secondary Impacts

• Chinese Export Inexpensive Goods
• Benefit US Consumers
• Harm US Competitors
• Net Benefit to US
• Chinese Compete for Raw Materials
• Chinese Supply Capital Inflows
• Chinese Develop New Technology?