China

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China

• Same size as Canada
• Population 1.3 bn
• 0.8 bn rural
• 0.5 bn urban

• 2007
• Arable land15
• Labor force
• agriculture 49
• industry 22
• services 29
• Savings rate
• 40 of GDP

1940s Semi-feudal Largely illiterate Peasants
85 pop. Grows 33mil (pop. of Canada) Every 18
months
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(No Transcript)
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History

• 1911 overthrow Manchu Dynasty, political turmoil
  
• 1925-49 Civil war
• Communists 100,000 rural guerilla forces
• Nationalists 700,000
• Long march
• 1945 Nationalists side with Communists to fight
  Japanese invasion
• 1949 Mao Zedong (age 54) declares People's
  Republic of China
• 1953 first "Five-Year Plan, heavy industry
• 1949-53 security "liquidates" 800,000 people
• 1957 "Let 100 flowers bloom, let 100 schools of
  thought contend
• criticism of decisions encouraged, unity must be
  restored once criticism taken into account
• It is not enough to attack reactionaries. We
  must know what reactionaries want and represent

Mao Zedong and Deng Xiaoping
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Mao Zedong Thought, 1950s

• New Marxist theory contradictions could arise
  between the rulers and the ruled in a Communist
  state
• Small-scale strikes are "beneficial" danger
  signals, revealing trouble that needs correction.
  Persuasion, not coercion, should be used
• Everything has two sides, a good side and a bad
  side
• Japanese attack bad - it meant war good - made
  it possible to mobilize nation around Communist
  party
• World War II bad- destruction good - crushed
  old imperialist colonial rule, brought closer to
  overthrow of capitalism
• Communist populations must be exposed to a
  certain amount of negative propaganda if they are
  to understand the nature of struggle between
  communism and capitalism
• Chiang Kai-shek's works and some Voice of America
  presentations to be published in China
• Population must be stabilized at present level
  600 mil
• No enough food, funds for education
• Propaganda to urge young people not to marry
  until they are 28 or 30, devote their early years
  to building up the country
• Abortion and birth- control made available in the
  cities
• seldom in rural areas, where 75 of population
  lives
• material benefits are withheld from mothers after
  the third child

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Great Leap Forward (1958-1960)

• Create 26,000 rural communes - 500 mil peasants
• Canteens, nurseries, kindergartens, tailoring
  teams, one standard of pay in goods - to wipe out
  the use of money
• 3 simple meals daily, uniform, shoes, towel, soap
  
• 2 hours of military drill a day, firearm
  training, rifles are stacked near places of work.
  
• 5 am march to work, 8am breakfast, 1pm lunch, an
  1.5 hours rest, workday ends at 6pm, communal
  supper. One Sunday off every second week
• "to make full use of labor power, to insure
  that there is no waste of the labor time of men
  and women"
• state directs financial resources into projects
  of "national character"
• Consequences
• agricultural production dropped to subsistence
  level
• Free-rider problem little incentive to work
  hard, little initiative
• Industrial output, heavy industry (steel) grew
• Exports fell
• Urban areas Shortages of food, rationing, long
  lines, widespread hunger
• Shortage of cotton and raw materials for textiles
  and other light industries
• food crisis, black market to carry food parcels
  from Hong Kong
• 1962 Mao admits Great Leap Forward was a
  disaster
• peasant encouraged to engage in sideline
  occupations - handicraft work, raising livestock,
  given a small private plot to grow food

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Break up with USSR, 1960sCultural Revolution
(1966-76)

• Late 1950s-60s Ideological conflict with Soviet
  Union
• Yugoslavia and USSR abandoned Marxism-Leninism,
  revisionists
• Soviet leaders sold out Chinas interests to
  United States
• Khrushchev's policy of "peaceful coexistence"
• Soviet "social-imperialism" expansionism
• All Soviet personnel expelled from China
• 1969 Soviet and Chinese border patrols clashed
• Russia increased army presence along Chinese
  frontier
• Cultural Revolution - campaign to revive
  revolutionary spirit
• younger generation does not know the sweat of
  the march, the hunger of short rations, the
  deadly chatter of the machine gun, the blood and
  the toil
• can not be trusted to make correct choice
  capitalism vs communism
• Policies universities closed, purge of
  professors, lecturers, teachers
• University students are to be admitted on the
  basis of class origin (worker or peasant
  background) and ideological purity, not
  examinations
• Conformity, no independent thought
• 1976 Death of Mao Zedong

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Reform 1978-84 Agriculture

• Liberalization of agriculture
• Creation of township and
• village enterprises (TVE)
• Dismantle collective farms
• Land distributed to households as 30 year leases
• Peasants can not sell or use land as collateral
  for loans
• Lease holders required to sell some planned
  amount at planned prices, market any amount
  beyond that
• Semi-ownership of land ? rise in labor
  productivity
• Labor freed-up ?formation of small-scale crafts
  and service TVEs
• 91 of agricultural output planned in 1978, 5 in
  1993
• Secure rights would encourage farmers to invest
  more, make land more productive, help food
  security
• Time lag between rural and urban reforms (6
  years) spared farmers from soaring agricultural
  input prices

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Reform 1984-present Industry

• SOE can market above-quota output
• 1996 plans controlled lt10 of industrial
  outputs
• "Open-door policy"
• Special Economic Zones (SEZ) and Economic,
  Technological Development Districts (ETDD)
• exempt from most controls on foreign investment
• 1989 Stock markets open
• Since 1992 "socialist market economy
• Late 1990s privatization of housing stock
• Gradualism with spectacular results
• No massive urban unemployment or poverty
• Lessons
• start small, focus on reforms with greatest
  probability of success
• gradually move on to more difficult problems
• limit amount of change people have to deal with
  at any one time ? support for further reforms
• Self-sustaining process

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How was 10 annual growth achieved?

• Three economic fundamentals sufficient for growth
  (Chow, 2003)
• 1. Abundance of high-quality human capital
• 2. Market institutions
• 3. Availability of modern technology to a late
  comer
• Examples Japan, Hong Kong, Singapore, Taiwan and
  South Korea
• Plus continued political stability
• Rate of growth will continue to be gt7 in the
  next 15 years because 3 economic fundamentals
  remain
• 2020 will surpass US in total output
• Min real GDP growth 7 - necessary to produce
  acceptable employment growth and maintain social
  stability

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Success of Reform

• Initial conditions before reform
• less was planned in China (1,200 commodities)
  than in Soviet Union
• Not much resistance to reforms
• After previous policies failed
• Investment from Chinese Diaspora
• 50 mil abroad, wealth equal to mainland
• labor intensive industries which were losing
  comparative advantage in Hong Kong and Taiwan
  moved to mainland China
• Reformers pragmatic, not ideological
• Preserving political monopoly of communist party
• Competence of government officials
• leaders (Deng Xiaoping, Zhao Ziyang), and lower
  level officials selected mainly according to
  ability
• Successful policies chosen by experimentation

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Challenges

• Wealth differential
• coastal vs interior provinces
• urban vs rural population
• Real rural income growth 2004 6.8, 2005 6.2
• Urban incomes growth 2005 9.6
• 150 million surplus rural workers adrift between
  villages and cities, subsisting through
  part-time, low-paying jobs
• Need population policies to prevent migration to
  cities
• New socialist countryside campaign, 2005
• spending on rural infrastructure
• roads, schools and hospitals
• abolish all school fees
• provide peasants with health insurance
• No provision for ownership of land fundamental
  problem ? no rural land markets

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Challenges

• Dual economy
• 1. private small and medium firms
• not favored by taxes, other policies
• 2. large corporatized SOE
• state is largest shareholder
• state hires managers
• banking and commanding heights
• state sector produces 25 GDP
• hard to sell shares to minority shareholders
• drain on state budget
• lt1/3 make profit
• technologically backward
• account for most of bad loans by state banks
• could cut down 1/3 of staff with no effect on
  output
• provide almost all social services to their
  workers
• workers earn most income moonlighting for private
  firms
• employ gt10 of work force (100 million)
• good source of corruption

President Hu Jintao
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• Rising demand for energy
• Largest oil consumer after US
• World's biggest producer and consumer of coal
• Coal 4/5 of China's energy use
• Massive investment in hydro-power
• 11th Five-Year Plan 20 reduction in energy
  consumption per unit of GDP by 2010

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Environmental degradation

• Toxic spills
• Hydropower dams diminish river flows
• Number of cars up from 4m in 2000 to projected
  130m by 2020
• Air pollution causes 427,000 extra deaths a year

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Main imports oil, copper, gas, timber

• Assembly from imported components gt50 of all
  exports
• Toys, telecoms equipment, electronics, computers
• Chinas effect on other countries production and
  trade
• Japans exports shift from exporting finished
  goods to Europe and North America towards
  exporting parts for assembly in China
• Japans imports office machines and computers
  used to come from America and Europe, now come
  from China

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Economy

• The Economist
• global inflation, interest rates, bond
  yields, house prices, wages, profits and
  commodity prices are now being increasingly
  driven by decisions in China.
• Fixed exchange rate
• since 1994 1 8.28 Yuan, 2005 8.11 Yuan
• Implicit subsidy to manufacturers
• Cheap exports- higher world demand
• 28 undervalued
• Government buys to keep Yuan from appreciating
• Foreign-exchange reserves largest in the world
• spent on US bonds, mortgage-backed securities,
  physical assets
• What if China stops buying US debt?
• Interest rates in US increase to attract
  investors
• Recession in US
• Global recession

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• Wages rise 2-3 times faster than in other
  low-wage Asian economies
• Along China's eastern seaboard (manufacturing for
  export) monthly pay 250-350
• In Thailand, Philippines, Indonesia average wages
  in manufacturing 100-200
• Companies moving further inland - cheaper labor
  but less skilled workers, higher transport costs
• Still 200m underemployed workers in rural areas
• How can other countries compete with China?
• make their manufacturing more sophisticated
• specialize in research and development, design,
  branding, financing, logistics
• foster competition in domestic service industries
  

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Challenges

• Financial system needs reform
• near monopoly of state on banking
• Non-performing loans
• Lack of transparency
• Legal system, rule of law, private property
  rights protection
• protection from political elite, corrupt
  bureaucrats
• limited enforcement of patent and intellectual
  property rights
• Japanese high-tech firms are wary of locating in
  China, fearing that their best design work will
  get pirated
• Demographic problem in near future
• fertility rate fell from 6 children per woman in
  1960s to 1.7 currently
• cultural preference for sons
• 23 million more young men than women - "marriage
  squeeze"
• increased crime, HIV and other STD, war
• Human rights
• persecution of monks loyal to Dalai Lama
• destruction of Tibetan Buddhist culture Beijing
• Capital punishment - thousands executed each year
  
• crimes from murder to tax evasion
• Threat to invade Taiwan ?