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Global and Political Economic Environment
and growth became (increasingly) “intensive”. Before about 1800. and to avoid diminishing returns. eastern and southern world. social structures that could support technological innovation. has suggested that China’s level of economic performance was more or less at par with that of Western Europe. despite the fact that China lost a significant amount of arable land to invading nomads as its population peaked. China witnessed a higher urbanization level. after China significantly improved its man-to-land ratio in the period after the Song only to find itself induced deeper into the agrarian trap. discovered Madagascar. the greatest world traveler before Columbus. and stagnation in technology” Assignment No: 1 Page |1 . leading to more people but almost no growth in income per capita. The Great Divergence debate Recent literature. and an explosion of technical inventions and institutional innovations. land. withering foreign trade. One of the big debates in economics is about the causes of the arguably most dramatic change in development trajectory in (recent) world history. It is argued that “during the Song Dynasty. most famously Kenneth Pomeranz’s The Great Divergence (2000). a declining division of labor. According to him. the reason that Europe “succeeded” and China did not was largely determined by pure chance—a lack of large deposits of coal and iron ore close to each other and the absence of large outward migration (after Zheng He.Global and Political Economic Environment China’s Economy Answer: China has been one of the world’s most dynamic economies in recent decades. large pools of accumulated capital. the most developed part of Western Europe. the emperors of the Ming Dynasty prohibited the construction of big ships and the Middle Kingdom experienced selfimposed isolation for four centuries). but it was mainly “extensive”. Moreover. and Saudi Arabia in the early fifteenth century.6 percent in 1820-70) because the demographic transition had not yet occurred.2 When technological progress accelerated in the nineteenth century but the population growth rates still remained high and growing (0. more prosperous commerce and international trade. mass migration to North America helped to alleviate pressure on a scarce resource. the lower Yangzi delta formed a core of economic prosperity comparable with the North Sea area. China was not inferior to Europe in terms of technology. land scarcity is seen as a factor that stimulates urbanization and industrialization. In a similar vein. after a lag. focused on an almost continuous growth of GDP per head. resulting in reduced urbanization. However. Pomeranz’s argument is that mass emigration from Europe played a crucial role in the transition to the modern growth regime from a Malthusian regime. After about 1800 this changed. etc. growth did occur. and gradually spread to large parts of the western and. the African Horn. There is consensus about the fact that this change in growth pattern started in northwestern Europe. the industrial revolution. but the industrial revolution occurred in Europe rather than China because European entrepreneurs were eager to adopt machines to cut down on high labor costs. Pomerantz argues that even in the eighteenth century.
or the entire population of Assignment No: 1 Page |2 . were on par with that of Northwestern Europe is built on rather fragile evidential base. This is approximately the distance of the trade route between Antwerp and Lisbon. This makes any optimistic assessment of China’s performance is difficult. Amsterdam with Spain and France. Trade between the fertile agricultural areas in the upper reaches of the Yangzi River of Sichuan Province and the urban regions of Shanghai at the Yangzi Delta involved covering distances of at least 1700 kilometers. not only in the scale and technology of production.4 Overall his work attests to industrial progress throughout these three centuries. Overall. but the real wage there was not noticeably higher than the real wage in Beijing or Canton. Market Efficiency and Legal Regime Institutions have figured relatively little in revisionist literature on Chinese economic history. printing. There are also comparable historical accounts of how grain was paid and transported along routes that connected the Yangzi Delta with Sichuan and Hunan.11 Much depends on whether one includes only the urban area importing the grain. but trade volume statistics are spotty at best. rough calculations suggest that 1 % of total consumption of the Mediterranean area was traded in the 16th century. and the situation may have remained much the same in the 17th century. apparel. or. the Chinese cities were in a tie for last place with the Italian cities. which had the lowest standard of living in Europe. Measures of Integration Although foreign trade in the 18th century was not significant. consumption or demographic data. They relied on indirect comparison based on scattered output. at least in the Lower Yangzi. Rea Wages Asian living standards. food processing. tool making.Global and Political Economic Environment China’s Economy Li’s The Early Industrialization in Jiangnan is particularly noteworthy for its systematic narrative of the growth of industries in cotton textile. China’s expansive empire meant that even domestic trade involved large distances. Pomeranz views the property rights or the freedom to contract in traditional China as no less secure or flexible than in Western Europe. The Yangzi Delta is reputed to have the most advanced economy of any Chinese province. This naturally leads the revisionist school to an explanation of the Great Divergence based on resource endowments. The efficiency of market institution seems to find some strong empirical confirmation from market integration studies based on statistical correlation of regional grain prices. tobacco. This on relatively rigorous comparison of the purchasing power of real wages of unskilled laborers in Asia and Europe reconstructed based on the systematic price and wage data. His depiction of the rise of a dynamic. construction and shipbuilding in the Lower Yangzi during 1550-1850. papermaking. In fact. diverse and commercialized printing industry reveals the existence of a mass reading public in the Lower Yangzi. but also in its organization and the extent of the division of labor. We may know about large specific transactions of grain. In Europe. And they were far behind that in London or Amsterdam – about 30-40% of that of earning levels there in terms of purchasing power measured by our reconstructed subsistence basket during the 1819th centuries. Trade.
producer-cum-consumer farming. It was not European eagerness for trade. China's eighteenth and nineteenth centuries were marked by substantial geographical expansion and economic integration of new regions. although differing from that in Europe.000 square kilometers and a population of approximately 20-36 million inhabitants in the 18th century may have imported as much as one-quarter of its total grain consumption. was still nearly 60%. Chinese agricultural productivity and standards of living were comparable to those in the leading regions of Europe as late as the eighteenth century. for the major political crises in seventeenth century China and the Middle East had similar fiscal. 5. that was the motive force in the global trading system of the sixteenth through early nineteenth centuries. the relevant per capita trade statistic must be much smaller indeed. In China.13 Grain was an important commodity. Chinese and Indian domestic economic activity in such areas as textile production and food processing was quite sophisticated with regard to large-scale mass production and trade. and available estimates suggest that agricultural output made up at least 60 % of GNP in re-industrial economies. 6. with a large share of consumption being in cereals. 3. as in Europe. the economy began to recover after years of wars. but adding in the potential number of exporters supplying this grain. 2. and material causes. the labor force was predominately engaged in agriculture. Even if we had more detailed information on the volume of trade. Chinese and Ottoman political dynamics were not wholly different in nature from those of European monarchies. In China in the 18th century. Chinese and Indian merchants operated with substantial autonomy. a figure also likely to be significantly lower than for the average farmer. 8. than European revolutions and rebellions of the same era. but China's desire to obtain silver bullion via trade. Monotony in foodstuffs. who it is said ate more meat and fish than their southern neighbors. 4. this would not be enough to establish the efficiency of markets. In 1953. not only in overall output.Global and Political Economic Environment China’s Economy potential exporters as well. The majority of the population was engaged in small-scale. Chinese international economic activity was vigorous and dynamic through the entire Ming and Qing periods. but some kind of per capita weighting is essential. After the establishment of the People's Republic of China in 1949. the Yangzi Delta alone with an area of 43.12 Available estimates on disaggregated trade flows are also vague on considerations such as the date of purchase and delivery or the point of origin and destination of each shipment. Chinese family structure. social. The share of cereals in the diet of urban dwelling northern Europeans. and had far larger commercial fortunes than most European merchants well into the late eighteenth century. the government adopted the Soviet-style central planning in the form of the first Assignment No: 1 Page |3 . but in consumption as well. 7. produced neither unlimited fertility nor unusually large or rapid population growth. however. was common in the lives of both European and Chinese. and often greater institutional consequences. Fig 1: PPP GDP per capita in major countries at Appendix A Conclusion 1.
state price controls on a wide range of Assignment No: 1 Page |4 . and price and production controls caused widespread distortions in the economy. As a result. citizens were encouraged to start their own businesses. workers. In addition. and importing high technology products into China. which enabled them to sell a portion of their crops on the free market. In addition. The central government initiated price and ownership incentives for farmers. China. which allowed them to experiment with free market reforms and to offer tax and trade incentives to attract foreign investment. Economic control of various enterprises was given to provincial and local governments. and allocated resources throughout most of the economy. by 1978 nearly three-fourths of industrial production was produced by centrally controlled. in the hope that this would significantly increase economic growth and raise living standards Economic Reforms Beginning in 1979. which followed in stages. especially trade. mainly because most aspects of the economy were managed and run by the central government (and thus there were few profit incentives for firms. the government established four special economic zones along the coast for the purpose of attracting foreign investment. which were generally allowed to operate and compete on free market principles. more advanced form of cooperatives and into Communes in 1958 as a part of Chairman Mao's Great Leap Forward Movement. foreign trade and investment flows were mainly limited to Soviet bloc countries. the farmers were first given land after the land-owners as a class was brutally destroyed. The Chinese government in 1978 (shortly after the death of Chairman Mao in 1976) decided to break with its Soviet-style economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West. boosting exports.Global and Political Economic Environment China’s Economy Five-Year Plan of 1953-1957. Additional reforms. competition was virtually nonexistent. Chinese living standards were substantially lower than those of many other developing countries. In agriculture. They were then organized into cooperatives. the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. The Great Leap led to the death of over 25 million people from 1959 to 1962. During the 1950s. or command. sought to decentralize economic policymaking in several sectors. The death rate was about 11 per thousand in 1957 and 1963. controlled prices. all of China’s individual household farms were collectivized into large communes. Private enterprises and enterprises formally controlled by the government of the Republic of China were reorganized into state enterprises. rather than under the direction and guidance of state planning. economy. To support rapid industrialization. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. China had the most severe famine in its history. A large share of the country’s economic output was directed and controlled by the state. Foreign trade was generally limited to obtaining only those goods that could not be made or obtained in China. which set production goals. China launched several economic reforms. Chinese Economy Prior to Reforms Prior to 1979. Additional coastal regions and cities were designated as open cities and development zones. Private enterprises and foreign-invested firms were generally barred. but went up to 17 per thousand in 1962. and farmers). as can be calculated by officially published death rates. state-owned enterprises (SOEs). maintained a centrally planned. Government policies kept the Chinese economy relatively stagnant and inefficient. In addition. according to centrally planned output targets. under the leadership of Chairman Mao Zedong.
The second was to make them financially independent. The urgency of the case was such that it had to occur as soon as the political leadership was ready after Chairman Mao's death. Reform of Chinese state-owned enterprises is an example of a gradual approach to economic reform through experimentation. Singapore and South Korea. Fourth. a part of an Assignment No: 1 Page |5 . Such prediction is easy to do by hindsight but more difficult to do before it occurs. foreign trade and investment. and in countries in Eastern and Western Europe. price reform. There were four reasons why the time was ripe for reform. successful economic development in other parts of Asia including Taiwan. I point out that the reform process has been a combination of the effort of the central government and the natural desire of the Chinese people and lower level government units to improve the economic institutions for their own benefits. allowing them to keep the earnings as their own profits after paying taxes to the state. Third. Six major components of economic reform beginning with agriculture. The third was to introduce a contract responsibility system.Global and Political Economic Environment China’s Economy products were gradually 1978 was the year when Deng Xiaoping took over control of the Communist Party. Under the contract responsibility system. after years of experience in economic planning government officials understood the shortcomings of the planning system and the need to change. first to selected parts of the enterprise under the important reform decision of October 1984. The direction of change was clear because economic planning was recognized to be a failure. The remaining areas are state-owned enterprises. the following concepts were accepted and carried out step by step. He was responsible for initiating reform of the planned economy towards a more market-oriented economy. In my opinion. rather than as revenue belonging to the government. Chinese economic reform in 1978 is an example of the possibility of predicting a major social change by examining the prevailing conditions. This lesson was reinforced by the contrasts between the different rates of economic development in North and South Korea. The first was to give state enterprises some autonomy in production decisions rather than simply carrying out the production targets under a system of central planning. For example it was a combination of the efforts of the farmers and the government which changed the Commune System. the non-state sectors and institutional infrastructure. In this case. known as the four Tigers. Hong Kong. the banking sector. Table 1: China’s Average Annual Real GDP Growth: 1960-210: Annexure B First. Given the above four reasons was economic reform in 1978 inevitable? The first two reasons alone were sufficient for the government to initiate reform. the Chinese people were ready for and would support economic reform. the process has been a gradual and experimental one and has proceeded in steps. for the same reasons as stated above. demonstrated to the Chinese government officials and the Chinese people that a market economy works better than a planned economy. the Cultural Revolution was very unpopular and the Party and the government had to distance themselves from the old regime and make changes to get the support of the people. The Cultural Revolution had made the government so unpopular that both the government and the people wanted to change eagerly. Given such a situation there was no other way for China to go. As far as the role of the central government is concerned. and later to an enterprise in 1987. Second.
including material inputs to state enterprises and foreign exchange. At the same time a second market was allowed to trade the scarce resource at market price. introduced in 1997. was to restructure the state enterprises into share-holding companies. Under such a system. In the meantime a two-tear price system was introduced to allocate scarce resources formerly under the control of central planning. or to the government controlling the enterprise. It will be useful to keep this general picture in mind when studying China's reform process in general or in a particular sector. The fifth. The fourth was the reform of the price system that gradually allowed prices to be determined by the market forces of demand and supply.Global and Political Economic Environment China’s Economy enterprise or the entire enterprise was allowed to keep all the gain (such as output produced) or profit after surrendering a fixed amount of it to the enterprise controlling the part. below market price. Assignment No: 1 Page |6 . the government continued to distribute the scarce resource to designated users at an official.
The importance for China’s economic development and its future international standing and welfare of maintaining political stability under the continuing leadership of the CCP was stressed. It was decided at this meeting that the system and methods of economic management in China would be transformed. The CCP now intended to concentrate on ‘rapid growth in production *to+ improve the people’s living standards significantly and strengthen national defense. The issuing by the CCP of the document ‘On Reform of Economic Structures’ in 1984 marked an important milestone in the strengthening of China’s economic reforms and their extension. and that scientific and educational work would be greatly strengthened to meet the needs of modernization. he emphasized the importance of academics and scientists for the future of the economic development and the international standing of China. This contrasted with the much earlier attempt by China to make massive economic advances during China’s Great Leap Forward. It was decided that the economic reforms should begin with agriculture because at that time it was ‘the foundation of the national economy’. Furthermore. There was recognition of the need to reduce bureaucratic centralized management of the economy and eliminate bureaucratic and political impediments to achieving economic efficiency and development. In mid-1981. It was agreed that following the success of China’s rural economic reforms. industry. Several important goals were outlined in the document ‘On Reform of Economic Structures’. These features were applied later to the rest of the economy. similar reforms should be extended to the whole economy with the focus now being placed on the urban economy. During 1978. He thought that this should be more widely recognized by the Chinese people. science and technology) was emphasized. Only modest and realistic goals would be sought. By continuing and extending reforms. economic co-operation with other countries would be expanded. It was stressed that a rational price system should be established for the whole economy and that this system should make use of economic incentives as Assignment No: 1 Page |7 . national defense. particularly at lower leves (such as local levels) of economic activity . decentralization and resource ownership in undertaking the agricultural reforms. This was consistent with Deng Xiaoping’s emphasis on professionalism and efficient economic management. Furthermore.Global and Political Economic Environment China’s Economy Already in 1977. it was hoped to establish a dynamic economy. the CPC again stressed the importance of striving for the modernization of China’s economy by acting systematically and in a staged fashion while basing its development policies on the realities of Chinese conditions and the level of available resources in China. The importance of the four modernizations (modernizing agriculture. invigorate enterprises and establish an economic system in which economic activity and production would be responsive to economic values. Deng Xiaoping’s reform philosophy gained growing support in the CCP and its desirability was accepted in December 1978 at the Third Plenary Session of the Eleventh Central Committee. Particular attention was given to the rule of law. professionalism and results should count. Deng Xiaoping made it clear that performance should be the main consideration in the economic and social advancement of individuals. In other words. special efforts would be made to adopt the world’s advanced technologies and equipment. it was stated that ‘The general task put forward by our Party for the new period reflects the demands of history and the people’s aspirations and represents their fundamental interests. This session proved to be a turning point in the direction of China’s policies for its economic and social development. Several other important decisions about reforms were made at the Third Plenary Session.
such as extension of the market system and greater economic openness as well as measures to limit population growth. Increasing emphasis occurs on greater economic openness as an instrument of development policy. Furthermore. Chairman Jiang Zemin confirms the direction of China’s development policies. it was confirmed that economic responsibility systems should be established for enterprises. The CCP decides that the economic reforms commenced in agriculture should be extended to the whole economy. This meant that the government no longer intended in the long-run to prop up uneconomic state enterprises with soft loans and other forms of financial support. Increasing CCP support for Deng Xiaoping’s reformist agenda culminates in its basic acceptance by the 11th Central Committee of the CCP. This was to ensure that investment and production decisions by enterprises were made on economic grounds rather than political ones. systematic and staged. Hua Guafeng becomes Chairman of the CCP and subsequently Deng Xiaoping returns from political exile. Great success was subsequently achieved in pursuing this goal. it was decided to press ahead with payment according to work as an economic incentive even though it was realized that this would result in greater income inequality. Notice was also given that it would no longer be the case that state enterprises would have an unassailable position in the economy. and take account of Chinese conditions. In addition. the development of market socialism with Chinese characteristics. He saw the need for China to improve its science and technology policy because as China catches up with the rest of the world’s technology. Enterprise functions were to be separated from those of the Government.Global and Political Economic Environment China’s Economy levers. A diversity of enterprise forms was to be encouraged. He criticizes dogmatic approaches to policy and favours a pragmatic approach Hua Guofeng steps down as Chairman of CCP Under the influence of Deng Xiaoping. It was argued that the reforms should begin with agriculture Deng Xiaoping becomes Chairman of the Military Commission. A continuing feature of China’s reforms would (according to this document dealing with economic reforms) be further promotion of economic openness through international economic cooperation. the CPC stresses that China’s policies for modernization must be realistically based. Chairman Mao Zedong dies. investment. This would mean the extension of reliance on market systems for organizing economic production – in essence. An end to the privileged position of state enterprises is signaled. Time Jan 1976 Sept 1977 Dec 1978 Event Premier Zhou Enlai dies. trade and exchange. it will need to do more to advance its own scientific and technological improvements 1979 1980 Mid-1981 1984 1989 A Review of China’s development strategies Assignment No: 1 Page |8 .
and to obtain growth with equity. Chinese reformers used two related strategies to simultaneously promote economic learning and overcome political resistance to reform: (1) reforms at the margin (e. As a result.g. and increasing social tensions. export•]oriented economic growth 3. and there is a need to reform and innovate on this front in order to sustain rapid growth. Experimentation and marginal reform as a solution to risk. and (2) more explicit experimentation. China’s spectacular growth and poverty reduction has been accompanied by rising inequality. the regional dimension of inequality rural/urban and inland/coastal dominates in a country as large as China. The institutions that have brought rapid growth so far are now under stress. and then increasingly export-oriented rural industries. and especially with its particular history. Regional inequality has become a key issue for China and a number of interventions have been introduced to address the problem. After introducing the open door policy. 4. In the global context. Since the economic reforms beginning in the late 1970s. We conclude this section by noting that all these explanations are highly compatible and complimentary with each other. which greatly boosted economic efficiency. After three decades of growth: the challenges of the present and the future After three decades of spectacular economic growth in China. massive foreign direct investment flowed in and married with China’s cheap labor. (3) experimentation (as an economic and political discovery mechanism). both capital and labor resources were more efficiently allocated. Realigning the economy towards China’s comparative advantage: China’s rapid growth since the reform is mainly due to the rebalancing of China’s developments strategy away from a central focus on heavy industry and in the direction of more labor-intensive sectors 2. Rising inequality is one of China’s most serious problems. the problem is no longer how to achieve growth but how to manage growth consequences and how to sustain growth. China possesses an obvious comparative advantage in the labor-intensive manufacturing sector. environmental degradation. (2) •”incentives matter” (fiscal decentralization and realignment of incentives towards growth-maximizing activities). Economic and Political Expansion: China’s remarkable economic success: (1) •”comparative advantage” (and conditional convergence).Global and Political Economic Environment China’s Economy 1. The heavy industry oriented development strategy justified the creation of the household registration system (hukou) which was a major contributor to the large rural‐urban divide. the central government has shifted its development strategies toward more labor intensive sectors. initially agriculture. The pattern of China’s regional inequality closely follows the history of its development strategies in the past half century. China’s development path therefore reemphasizes the importance of adhering to comparative advantage in creating labor•]intensive. and that together they comprise a compelling and holistic explanation of China’s economic miracle. uncertainty and opposition: In the economic arena. Assignment No: 1 Page |9 .2 The economic role of these policies is self‐discovery in the face of uncertainty. dual track pricing in agriculture and housing). In particular. and (4) pressure and crisis as inducers of reform.
many relocated farmers filed petitions to the upper level government for help. such as Jiangsu Province and Zhejiang Province. many local governments provide preferential treatment to investors. Similarly. Assignment No: 1 P a g e | 10 . and land disputes have become a breeding ground for social unrest all over China (Yu. they are more likely to levy heavy taxes on existing enterprises. In contrast. In summary. In order to attract investment. has helped the coast to better exploit its comparative advantage in the international markets. the compensation to farmers was often far below the market level. which granted preferential treatment to coastal areas. but left many interior provinces lagging behind. The cost of cleaning up the environment problem may eat up a large portion of the gains from industrialization. fiscal decentralization policy promoted local government officials to develop their own economies. Regions with better endowments thereby have more revenues left to invest in public goods and improve business environment after turning over a portion of their fiscal revenues to the upper level government and maintaining the daily operation of local government. 2003). In the process of procuring farming land for industrial or other commercial use. the successful development strategies mentioned in the above section also have some deleterious side effects. Their local revenues are sometimes barely sufficient to cover the salaries of civil servants on the public payroll. such as free land. The investment‐driven growth model also induces local officials to collude with investors at the expense of the rights of individuals. but differences in initial endowments tends to leave the effective tax rate regressive across Chinese regions (Zhang. many local governments loosen their environmental regulations to allow polluters to operate as long as they generate lucrative revenues for the local government. 2006b). In the rapidly industrializing coastal areas. worsening the business investment environment. the local governments in poor regions have difficulty in competing with the governments on the coast to attract investment and develop the local nonfarm economy. Consequently. the degree of water pollution and industrial waste hazard is alarming.Global and Political Economic Environment China’s Economy The open‐door policy. How to make local government officials accountable has become an increasingly important issue. The inter‐juridical competition is a key contributing factor to the increasingly serious environmental problems. Resenting this unfair treatment. In order to attract investment.
Global and Political Economic Environment China’s Economy Appendix A Assignment No: 1 P a g e | 11 .
Global and Political Economic Environment Annexure B China’s Economy Assignment No: 1 P a g e | 12 .
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