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The Chinese Economy: Introduction

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Title: The Chinese Economy: Introduction


1
The Chinese Economy Introduction
  • Lecturer Zhigang Li

2
China
3
China
4
China
  • Labor-abundant (20 of world)
  • Land-scarce (7 of world)
  • Resource-scarce
  • Coal 11 of world
  • Petroleum 2.3
  • Natural gas 0.8
  • Suggest labor-intensive and knowledge-intensive
    economic structure.

5
Ming-Ching Transition
End of Ching
Yuan-Ming Transition
Sung-Yuan Transition
Sung Dynasty
6
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7
Current Status (2003)
  • GDP per capita reached 4,726 (2000 price)
  • Industrial sector accounts for 40.5 of GDP
  • 41 of people lived in cities.
  • Life expectancy and literacy are not much higher
    than countries with similar income level.
  • China becomes more open and easier to analyze.

8
Important Years
  • 1911 End of traditional economy
  • 1937 Wars
  • 1949 Communist party taking control
  • 1978 Reform and opening

9
Questions to address
  • Is 1949 a turning point for Chinas growth?
  • Why China has chosen the reform-and-opening path
    in 1978?

10
1949
  • Radical change in government
  • Radical change in economic performance
  • Before 1949 Mediocre or poor economic
    performance
  • After 1949 Rapid and modern economic growth
    (sometimes turbulent).

11
Is 1949 a turning point for Chinas growth?
  • Historians (traditional view)
  • Yes
  • Social discontinuity
  • Economy after 1949 wouldnt have grown rapidly
    without the new government.
  • (Some) Economists (new view)
  • Maybe not
  • Economic continuity
  • Rapid growth after 1949 is a natural process and
    the new government is not crucial.

12
Social Discontinuity
  • Before 1949 Unfair distribution of control over
    land and other income-producing assets. Corrupt
    political power prevented the emergence of
    economic growth.
  • After 1949 The Revolution solved some of the
    problem (unfair land and asset distribution),
    unleashing a rapid acceleration of economic
    growth.

13
Economic Continuity
  • The Traditional Chinese Economy (1127-1911)
  • The beginning of industrialization (1912-1949)
  • War and civil war (1937-1949)
  • Big Push industrialization (1949-1978)

14
The Traditional Economy (1127-1911)
  • High-productivity traditional agriculture
  • Selected seed varieties
  • Organic fertilizer
  • Irrigation
  • Intensive application of human labor
  • Commercialized countryside
  • Small-scale, Bottom-Heavy Economy
  • Competitive markets
  • Sophisticated institutions

15
Bottom-heavy Economy
  • Household-based economy
  • Agriculture and nonagriculture are based on
    small-scale rural households.
  • In many cases the production chain consists of
    separate specialized households connected by
    markets (e.g. the production of silk cloth)
  • Accumulation of capital into large enterprises
    was difficult
  • Prevent wealth to be too obvious to potential
    predators or officials.

16
Competitive Markets
  • Highly competitive markets (numerous suppliers,
    easy entry, frequent exit) for most products
  • Coal and iron
  • Textiles
  • Tea
  • Competitive markets for land and labor
  • Substantial social mobility

17
Sophisticated Institutions
  • Widespread use of paper money
  • Familiarity of large formal organizations
  • Clan or lineage organizations
  • Advanced commercial procedures
  • Contracts
  • Middlemen
  • Legal and customary institutions
  • Traditional banks help transfer funds

18
Crisis of the Traditional Economy
  • Structural deficiency
  • Lack of large producers
  • Lack of strong government
  • Consequences
  • Lack of large-scale coordination
  • Lack of standardization and reliable high quality
    (e.g. the failure of tea export industry)
  • Failed response to the West and Japan

19
Food Crisis and Government Degeneration
  • Food crisis
  • Rapid population growth
  • Shortage of land by the end of the 18th century,
    all potential land (except for some of Manchuria)
    has been farmed.
  • Technology advances stagnated.
  • Impact on the Government
  • Reserves of food in public granaries declined
    after 1790s.
  • Large-scale irrigation networks deteriorated
  • Reduced government size

20
Failed Response to the West and Japan
  • China had export surplus before 1820s.
  • Opium imports from Britain changed China to an
    import-surplus country, leading to net outflow of
    silver.
  • Chinese attempts to stop opium import led to war
    with Britain in 1839. China lose (Hong Kong lost
    to Britain).
  • Sino-Japanese War in 1895
  • Over 80 Treaty Ports (Shanghai especially) at the
    peak

21
Industrialization (1912-1937)
  • The Qing dynasty collapsed in the 1911
    Revolution.
  • The Nationalist (Guomindang) Party unified the
    nation in 1927.
  • Japan invaded China in 1937.
  • The Nanjing decade (1927-1936)
  • A national project surveying national resources
  • National development plans drawn up
  • Skilled individuals trained
  • New technologies developed

22
Industry
  • Modern factory production grew at 8-9 annually
    between 1912 and 1936.
  • In 1933 modern factories produced 2 of GDP and
    employed a million workers (0.4 of labor force).
  • Two patterns
  • Treaty Port industrialization
  • Manchurian industrialization

23
Treaty Port Industrialization
  • Light, consumer-goods industries (the downstream
    end of value chain)
  • Textiles (42)
  • Enclave industrialization was started by
    foreigners and grew under the impetus of foreign
    example and competition.
  • By the 1930s, 78 of the value of factory output
    came from Chinese-owned firms.

24
Manchurian Industrialization
  • Investment primarily by Japan
  • In 1931, Japan established the puppet state of
    Manchukuo, effectively extending control to all
    of Manchuria.
  • Focus on heavy industries and railroads
  • Produce raw materials for Japanese domestic
    industries

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26
Height
27
War and Civil War (1937-1949)
  • By the end of the war, the majority of Chinas
    industrial capacity (electric power, iron, and
    cement) was in Manchuria.
  • By 1947 the Chinese government controlled 90 of
    iron and steel output, two-thirds of electricity,
    and 45 of cement output. Most major banks and
    transportation companies were government
    controlled.
  • Inflation If the Shanghai prewar price level is
    100, the price level in 1948 was 660 million.

28
The Socialist Era (Big Push Industrialization)
(1949-1978)
  • Major deviation from the pre-1949
    industrialization
  • Against Chinas traditional household-based
    economy.
  • Develop a massive socialist industrial complex
    through direct government control
  • Inward-directed strategy rather than the coastal
    enclave industrialization

29
Legacies of the pre-1949 Economy
  • State-own firms (including the core of heavy
    industries) are transferred to the Communist
    Party government.
  • The nucleus of a planning apparatus and many
    skilled officials are left to the post-1949
    government.
  • Relative high human capital
  • High literacy rates
  • A small university system
  • Skilled individuals trained abroad

30
The Big Bush Development Strategy
  • High investment rate
  • Around 25 in the beginning of 1950s and
    increased to 40 by 2004.
  • As high as 43 during the GLF
  • Most investment went to industry, especially
    heavy industry.
  • Industrial output grew at an average annual rate
    of 11.5.
  • Industrys share of total GDP climbed from 18 to
    44.

31
How was the Big Push Strategy Achieved?
  • The command economy system

32
The Command Economy System
  • The government directly control all large
    factories, transportation, communication, land,
    and farms.
  • Planners assign production targets to firms and
    allocate resources and goods among different
    producers.
  • Investments are made by the governments. Fiscal
    revenues mainly come from State-owned firms
    profits.
  • Prices do not reflect market demand and supply.
    Government can increase revenue by setting goods
    prices (e.g. prices of labor and raw materials
    are set low and those of industrial goods are set
    high.)

33
Difference between the System of China and Soviet
Union
  • The core planning system in China was much less
    centralized and much less tightly controlled.
  • Transportation and communication were less
    developed in China.
  • The system in China allocates a maximum of 600
    varieties of industrial product. The Soviet Union
    had allocated 60,000 separate commodities by
    1970s.
  • More authority could be exercised by those in the
    middle, typically local government officials.

34
Is 1949 a turning point for Chinas growth?
  • Is the economic conditions that existed before
    1949 important for the development strategy after
    1949?
  • Probably.
  • Would the Nationalists have taken the
    heavy-industry-priority strategy?
  • Maybe not. Taiwan underwent rapid
    industrialization focusing on light manufacturing
    and export markets (table 3.1, pp.58).

35
More on the Socialist Era (1949-1978)
  • 1949-1952 Economic discovery
  • 1953-1966 Pre-Cultural Revolution
  • 1956-1957 Hundred Flowers
  • 1958-1960 The Great Leap Forward (GLF)
  • 1967-1976 Cultural Revolution
  • 1976-1978 Post-Cultural Revolution

36
Policy Instability during the Socialist Era
  • Frequent sharp turns in policy, including
    economic policy (Figure 3.2, pp. 63)
  • The policy instability could be due to the
    continuous competition for power by advocates in
    the Communist party of different policies
    (leftist vs. rightist).
  • Policy swings like a pendulum from left to right
    and back again, driving and in turn be driven by
    economic developments.

37
Different Stages of the Socialist Era
  • 1949-1952 Economic recovery
  • 1953-1956 Twin peaks of the first Five-Year Plan
  • 1956-1957 The Hundred Flowers
  • 1958-1960 The Great Leap Forward
  • 1961-1963 Crisis and readjustment
  • 1964-1966 Launch of Third Front
  • 1967-1969 The Cultural Revolution
  • 1970 A new leap
  • 1972-1976 Consolidation and drift

38
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39
Economic Recovery (1949-1952)
  • Targeting the Soviet economic model, with the
    help of Soviet.
  • Korean war in 1950 (ended in 1953)
  • Trade boycott against China
  • Tight control of the budget and money supply
    brought inflation under control by the end of
    1950.
  • Radical land reform in the countryside
  • Between 1950 and 1952, 42 of Chinas arable land
    was redistributed, mostly in the south.
  • By 1952 both industry and agriculture surpassed
    their highest prerevolutionary levels.

40
Twin Peaks (1953-1956)
  • First Five-Year Plan (1953-1957)
  • Peak one (1953) large-scale investment projects
    with the help of Soviet (machinery, technology,
    technicians)
  • Peak two (1956) Transformation to public
    ownership was abruptly pushed through
  • By the end of 1956, 98 of farm households had
    been enrolled in cooperatives or collectives in
    1954, 2.
  • Private ownership in cities was virtually
    extinguished during six months in 1955-1956.

41
Hundred Flowers (1956-1957)
  • Hundred Flowers A period of liberalism
  • Programs of economic reform (e.g. the role of
    market, different forms of ownership) were openly
    discussed
  • Rapid social mobility farmers moved into the
    city and young people entered college
  • Economy is more flexible and market responsive
  • Virtually every sector of the economy was
    rehabilitated.

42
Great Leap Forward (1958-1960)
  • Two fatal decisions
  • The supply of labor and land was reduced for
    agriculture.
  • The procurement of grain (the compulsory
    deliveries of food to the state) was increased.
  • Through the end of 1961, about 25-30 million
    excess deaths occurred. In addition, another
    roughly 30 million births were postponed due to
    malnutrition and shortage.

43
Crisis and Readjustment (1961-1963)
  • Investment was chopped back.
  • Some 20 million workers were sent back to the
    countryside.
  • Household-based production revived
  • Bonuses and material incentives revived.
  • Small factories were shut down by the thousands
  • Recentralization
  • Most basic necessities were rationed
  • Importing food

44
Launch of the Third Front (1964-1966)
  • The Third Front was a massive construction
    program focused on China inland provinces.
  • The objective was to create an entire industrial
    base that would provide China with strategic
    independence.

45
The Cultural Revolution (1967-1969)
  • The Cultural Revolution was not a particularly
    important event in the economic sense.

46
A New Leap in 1970
  • Investment on the Third Front intensified again.
  • Decentralization
  • Relative autarky Economic links with the outside
    world and between different regions of China were
    minimized.
  • Almost complete absence of material incentives
    (bonuses or piece rates)
  • Market-driven labor mobility virtually ceased.
    Urban school-leavers were sent to the
    countryside, and the government directed manpower
    and resources to remote inland areas.

47
Consolidation and Drift (1972-1976)
  • Demand and supply for agricultural outputs again
    became unbalanced (by a wide margin) by 1971.
  • US-China relationship improved (Nixon visited
    China in 1972). Industrial equipment (e.g.
    fertilizer plants) was imported from the West by
    a large scale.
  • Investment was cut back.
  • Continuous fight between the leftist and rightist.

48
The End of Maoism and Leap Outward
  • Mao died in September 1976.
  • The Gang of Four (supporters of Mao) were put in
    prison shortly after the death of Mao.
  • Focus of China went back to improving the
    economy.
  • Leap outward (by the new leader Hua Guofeng) A
    10-year plan to make a massive investment push
    (120 large-scale projects), based on the faulty
    assumption that Chinas oil output and export was
    sufficient to finance the plan.

49
A Final Turning Point
  • The December 1978 Third Plenum (meeting of all
    members) initiated a new era in the Chinese
    Economy and Chinese politics.
  • A host of new policies were adopted (reform and
    opening)
  • The command economy strategy gave way to more
    market-based strategy.

50
Why China Turned around in 1978
  • The heavy-industry-and-closed-economy strategy
    could not let China continue high growth rate
  • Agricultural output can not keep pace with
    industrial growth.
  • Unsatisfied people
  • Suppressed consumption
  • Lack of mobility
  • Urban-rural gap
  • Death of Mao in 1976

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54
Economic Status by 1978
  • Still quite poor per capita GDP of 674 (2000
    price)
  • Industrial sector accounts for 44 of GDP. Energy
    consumption intensity is several times that of
    other low-income countries.
  • Only 18 of population lived in cities.
  • Literacy and life expectancy were quite high.

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