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China’s Economy

Global and Political Economic Environment

It is argued that “during the Song Dynasty. and to avoid diminishing returns. focused on an almost continuous growth of GDP per head. eastern and southern world. According to him. and an explosion of technical inventions and institutional innovations.6 percent in 1820-70) because the demographic transition had not yet occurred. In a similar vein.  Before about 1800. and growth became (increasingly) “intensive”. The Great Divergence debate Recent literature. land scarcity is seen as a factor that stimulates urbanization and industrialization. discovered Madagascar. 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. the industrial revolution. after a lag. There is consensus about the fact that this change in growth pattern started in northwestern Europe. land. large pools of accumulated capital. China was not inferior to Europe in terms of technology. growth did occur. the most developed part of Western Europe.Global and Political Economic Environment China’s Economy Answer: China has been one of the world’s most dynamic economies in recent decades. 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. despite the fact that China lost a significant amount of arable land to invading nomads as its population peaked. and Saudi Arabia in the early fifteenth century. resulting in reduced urbanization. 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. However. most famously Kenneth Pomeranz’s The Great Divergence (2000). etc. has suggested that China’s level of economic performance was more or less at par with that of Western Europe. leading to more people but almost no growth in income per capita. but it was mainly “extensive”. the lower Yangzi delta formed a core of economic prosperity comparable with the North Sea area. One of the big debates in economics is about the causes of the arguably most dramatic change in development trajectory in (recent) world history. a declining division of labor. China witnessed a higher urbanization level. more prosperous commerce and international trade. the African Horn. the emperors of the Ming Dynasty prohibited the construction of big ships and the Middle Kingdom experienced selfimposed isolation for four centuries). withering foreign trade. social structures that could support technological innovation. mass migration to North America helped to alleviate pressure on a scarce resource. Pomerantz argues that even in the eighteenth century.2 When technological progress accelerated in the nineteenth century but the population growth rates still remained high and growing (0. the greatest world traveler before Columbus. 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. and stagnation in technology” Assignment No: 1 Page |1 . Moreover.  After about 1800 this changed. and gradually spread to large parts of the western and.

or. Amsterdam with Spain and France. The efficiency of market institution seems to find some strong empirical confirmation from market integration studies based on statistical correlation of regional grain prices. Overall. They relied on indirect comparison based on scattered output. We may know about large specific transactions of grain. 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. In Europe. which had the lowest standard of living in Europe. rough calculations suggest that 1 % of total consumption of the Mediterranean area was traded in the 16th century. were on par with that of Northwestern Europe is built on rather fragile evidential base. tobacco. Measures of Integration Although foreign trade in the 18th century was not significant. papermaking. This makes any optimistic assessment of China’s performance is difficult.11 Much depends on whether one includes only the urban area importing the grain.4 Overall his work attests to industrial progress throughout these three centuries. but also in its organization and the extent of the division of labor. printing. not only in the scale and technology of production. In fact. There are also comparable historical accounts of how grain was paid and transported along routes that connected the Yangzi Delta with Sichuan and Hunan. 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. Trade. but trade volume statistics are spotty at best. and the situation may have remained much the same in the 17th century. food processing. apparel. or the entire population of Assignment No: 1 Page |2 . but the real wage there was not noticeably higher than the real wage in Beijing or Canton. Pomeranz views the property rights or the freedom to contract in traditional China as no less secure or flexible than in Western Europe. His depiction of the rise of a dynamic. 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. Market Efficiency and Legal Regime Institutions have figured relatively little in revisionist literature on Chinese economic history. consumption or demographic data. 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. 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. This is approximately the distance of the trade route between Antwerp and Lisbon. diverse and commercialized printing industry reveals the existence of a mass reading public in the Lower Yangzi. the Chinese cities were in a tie for last place with the Italian cities. construction and shipbuilding in the Lower Yangzi during 1550-1850. Rea Wages Asian living standards. at least in the Lower Yangzi.

The share of cereals in the diet of urban dwelling northern Europeans. was common in the lives of both European and Chinese. but adding in the potential number of exporters supplying this grain. 3. In China in the 18th century. China's eighteenth and nineteenth centuries were marked by substantial geographical expansion and economic integration of new regions. 7. 2. and available estimates suggest that agricultural output made up at least 60 % of GNP in re-industrial economies.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. Monotony in foodstuffs. After the establishment of the People's Republic of China in 1949. but in consumption as well. not only in overall output. and had far larger commercial fortunes than most European merchants well into the late eighteenth century. the labor force was predominately engaged in agriculture. Chinese and Indian merchants operated with substantial autonomy. this would not be enough to establish the efficiency of markets. Chinese family structure. was still nearly 60%. who it is said ate more meat and fish than their southern neighbors. for the major political crises in seventeenth century China and the Middle East had similar fiscal. but China's desire to obtain silver bullion via trade. Chinese and Ottoman political dynamics were not wholly different in nature from those of European monarchies. however. 4. Fig 1: PPP GDP per capita in major countries at Appendix A Conclusion 1. although differing from that in Europe. as in Europe. 6. In 1953. producer-cum-consumer farming.13 Grain was an important commodity. Even if we had more detailed information on the volume of trade. The majority of the population was engaged in small-scale. and often greater institutional consequences. social. produced neither unlimited fertility nor unusually large or rapid population growth. Chinese agricultural productivity and standards of living were comparable to those in the leading regions of Europe as late as the eighteenth century. It was not European eagerness for trade. and material causes. 8. that was the motive force in the global trading system of the sixteenth through early nineteenth centuries. 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. the Yangzi Delta alone with an area of 43. 5. a figure also likely to be significantly lower than for the average farmer. but some kind of per capita weighting is essential. the economy began to recover after years of wars. Chinese international economic activity was vigorous and dynamic through the entire Ming and Qing periods. In China. the government adopted the Soviet-style central planning in the form of the first Assignment No: 1 Page |3 . with a large share of consumption being in cereals. the relevant per capita trade statistic must be much smaller indeed. than European revolutions and rebellions of the same era.Global and Political Economic Environment China’s Economy potential exporters as well.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.

To support rapid industrialization. the farmers were first given land after the land-owners as a class was brutally destroyed. Chinese living standards were substantially lower than those of many other developing countries. state-owned enterprises (SOEs). In agriculture. workers. They were then organized into cooperatives. which set production goals. Government policies kept the Chinese economy relatively stagnant and inefficient. mainly because most aspects of the economy were managed and run by the central government (and thus there were few profit incentives for firms. and allocated resources throughout most of the economy. or command. under the leadership of Chairman Mao Zedong. but went up to 17 per thousand in 1962. China had the most severe famine in its history. all of China’s individual household farms were collectivized into large communes.Global and Political Economic Environment China’s Economy Five-Year Plan of 1953-1957. foreign trade and investment flows were mainly limited to Soviet bloc countries. The central government initiated price and ownership incentives for farmers. Chinese Economy Prior to Reforms Prior to 1979. and farmers). A large share of the country’s economic output was directed and controlled by the state. maintained a centrally planned. economy. which were generally allowed to operate and compete on free market principles. competition was virtually nonexistent. citizens were encouraged to start their own businesses. as can be calculated by officially published death rates. In addition. The death rate was about 11 per thousand in 1957 and 1963. state price controls on a wide range of Assignment No: 1 Page |4 . Additional reforms. 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. according to centrally planned output targets. by 1978 nearly three-fourths of industrial production was produced by centrally controlled. The Great Leap led to the death of over 25 million people from 1959 to 1962. Additional coastal regions and cities were designated as open cities and development zones. Private enterprises and enterprises formally controlled by the government of the Republic of China were reorganized into state enterprises. China launched several economic reforms. As a result. and price and production controls caused widespread distortions in the economy. in the hope that this would significantly increase economic growth and raise living standards Economic Reforms Beginning in 1979. boosting exports. the government established four special economic zones along the coast for the purpose of attracting foreign investment. In addition. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. Economic control of various enterprises was given to provincial and local governments. During the 1950s. rather than under the direction and guidance of state planning. which followed in stages. which enabled them to sell a portion of their crops on the free market. especially trade. Private enterprises and foreign-invested firms were generally barred. and importing high technology products into China. controlled prices. which allowed them to experiment with free market reforms and to offer tax and trade incentives to attract foreign investment. Foreign trade was generally limited to obtaining only those goods that could not be made or obtained in China. China. sought to decentralize economic policymaking in several sectors. more advanced form of cooperatives and into Communes in 1958 as a part of Chairman Mao's Great Leap Forward Movement. In addition. the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s.

Singapore and South Korea. and later to an enterprise in 1987. after years of experience in economic planning government officials understood the shortcomings of the planning system and the need to change. In my opinion. allowing them to keep the earnings as their own profits after paying taxes to the state. the banking sector. As far as the role of the central government is concerned. 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 the same reasons as stated above. the Chinese people were ready for and would support economic reform. For example it was a combination of the efforts of the farmers and the government which changed the Commune System. He was responsible for initiating reform of the planned economy towards a more market-oriented economy. 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 second was to make them financially independent. In this case. foreign trade and investment. 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. The third was to introduce a contract responsibility system. the process has been a gradual and experimental one and has proceeded in steps. There were four reasons why the time was ripe for reform. Such prediction is easy to do by hindsight but more difficult to do before it occurs. Reform of Chinese state-owned enterprises is an example of a gradual approach to economic reform through experimentation. This lesson was reinforced by the contrasts between the different rates of economic development in North and South Korea. The direction of change was clear because economic planning was recognized to be a failure. The remaining areas are state-owned enterprises. rather than as revenue belonging to the government. Fourth. Chinese economic reform in 1978 is an example of the possibility of predicting a major social change by examining the prevailing conditions. the following concepts were accepted and carried out step by step.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. Third. Given such a situation there was no other way for China to go. 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. Second. a part of an Assignment No: 1 Page |5 . Hong Kong. Six major components of economic reform beginning with agriculture. demonstrated to the Chinese government officials and the Chinese people that a market economy works better than a planned economy. price reform. Under the contract responsibility system. first to selected parts of the enterprise under the important reform decision of October 1984. and in countries in Eastern and Western Europe. 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 non-state sectors and institutional infrastructure. successful economic development in other parts of Asia including Taiwan. known as the four Tigers. The Cultural Revolution had made the government so unpopular that both the government and the people wanted to change eagerly. Table 1: China’s Average Annual Real GDP Growth: 1960-210: Annexure B First.

In the meantime a two-tear price system was introduced to allocate scarce resources formerly under the control of central planning. The fifth. 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 fourth was the reform of the price system that gradually allowed prices to be determined by the market forces of demand and supply. Assignment No: 1 Page |6 .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. or to the government controlling the enterprise. introduced in 1997. the government continued to distribute the scarce resource to designated users at an official. was to restructure the state enterprises into share-holding companies. Under such a system. 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. below market price.

special efforts would be made to adopt the world’s advanced technologies and equipment. 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. 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. 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. professionalism and results should count. particularly at lower leves (such as local levels) of economic activity . science and technology) was emphasized. This was consistent with Deng Xiaoping’s emphasis on professionalism and efficient economic management. and that scientific and educational work would be greatly strengthened to meet the needs of modernization. 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. Furthermore. It was agreed that following the success of China’s rural economic reforms. Particular attention was given to the rule of law. 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. 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 . economic co-operation with other countries would be expanded. decentralization and resource ownership in undertaking the agricultural reforms. The importance of the four modernizations (modernizing agriculture. During 1978. he emphasized the importance of academics and scientists for the future of the economic development and the international standing of China. it was hoped to establish a dynamic economy. By continuing and extending reforms. similar reforms should be extended to the whole economy with the focus now being placed on the urban economy. This contrasted with the much earlier attempt by China to make massive economic advances during China’s Great Leap Forward. This session proved to be a turning point in the direction of China’s policies for its economic and social development. Only modest and realistic goals would be sought. Several important goals were outlined in the document ‘On Reform of Economic Structures’. invigorate enterprises and establish an economic system in which economic activity and production would be responsive to economic values. It was decided at this meeting that the system and methods of economic management in China would be transformed. These features were applied later to the rest of the economy. national defense. Several other important decisions about reforms were made at the Third Plenary Session. He thought that this should be more widely recognized by the Chinese people. Deng Xiaoping made it clear that performance should be the main consideration in the economic and social advancement of individuals. In mid-1981. industry. 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. Furthermore. In other words. It was decided that the economic reforms should begin with agriculture because at that time it was ‘the foundation of the national economy’.Global and Political Economic Environment China’s Economy Already in 1977. The CCP now intended to concentrate on ‘rapid growth in production *to+ improve the people’s living standards significantly and strengthen national defense.

Furthermore. It was argued that the reforms should begin with agriculture Deng Xiaoping becomes Chairman of the Military Commission. Hua Guafeng becomes Chairman of the CCP and subsequently Deng Xiaoping returns from political exile. An end to the privileged position of state enterprises is signaled. the CPC stresses that China’s policies for modernization must be realistically based. Chairman Jiang Zemin confirms the direction of China’s development policies. 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. Time Jan 1976 Sept 1977 Dec 1978 Event Premier Zhou Enlai dies. Enterprise functions were to be separated from those of the Government. Increasing CCP support for Deng Xiaoping’s reformist agenda culminates in its basic acceptance by the 11th Central Committee of the CCP. This would mean the extension of reliance on market systems for organizing economic production – in essence. investment. In addition. 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. 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. 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. Chairman Mao Zedong dies. Notice was also given that it would no longer be the case that state enterprises would have an unassailable position in the economy. such as extension of the market system and greater economic openness as well as measures to limit population growth. systematic and staged. Great success was subsequently achieved in pursuing this goal. Increasing emphasis occurs on greater economic openness as an instrument of development policy. 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 . the development of market socialism with Chinese characteristics. The CCP decides that the economic reforms commenced in agriculture should be extended to the whole economy. trade and exchange. This was to ensure that investment and production decisions by enterprises were made on economic grounds rather than political ones. A diversity of enterprise forms was to be encouraged.Global and Political Economic Environment China’s Economy levers. 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. and take account of Chinese conditions. it was confirmed that economic responsibility systems should be established for enterprises.

export•]oriented economic growth 3. and (4) pressure and crisis as inducers of reform. and to obtain growth with equity. Experimentation and marginal reform as a solution to risk. In the global context. initially agriculture. the central government has shifted its development strategies toward more labor intensive sectors. China’s spectacular growth and poverty reduction has been accompanied by rising inequality. and (2) more explicit experimentation. China possesses an obvious comparative advantage in the labor-intensive manufacturing sector. and especially with its particular history. 4. (3) experimentation (as an economic and political discovery mechanism). In particular. After three decades of growth: the challenges of the present and the future After three decades of spectacular economic growth in China.2 The economic role of these policies is self‐discovery in the face of uncertainty. and then increasingly export-oriented rural industries. and that together they comprise a compelling and holistic explanation of China’s economic miracle. As a result. which greatly boosted economic efficiency. both capital and labor resources were more efficiently allocated. After introducing the open door policy. Rising inequality is one of China’s most serious problems. massive foreign direct investment flowed in and married with China’s cheap labor. China’s development path therefore reemphasizes the importance of adhering to comparative advantage in creating labor•]intensive. uncertainty and opposition: In the economic arena. and increasing social tensions. 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. dual track pricing in agriculture and housing). Regional inequality has become a key issue for China and a number of interventions have been introduced to address the problem. the regional dimension of inequality rural/urban and inland/coastal dominates in a country as large as China. 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.g. The institutions that have brought rapid growth so far are now under stress. and there is a need to reform and innovate on this front in order to sustain rapid growth. Assignment No: 1 Page |9 . We conclude this section by noting that all these explanations are highly compatible and complimentary with each other.Global and Political Economic Environment China’s Economy 1. environmental degradation. Economic and Political Expansion: China’s remarkable economic success: (1) •”comparative advantage” (and conditional convergence). Since the economic reforms beginning in the late 1970s. the problem is no longer how to achieve growth but how to manage growth consequences and how to sustain growth. Chinese reformers used two related strategies to simultaneously promote economic learning and overcome political resistance to reform: (1) reforms at the margin (e. The pattern of China’s regional inequality closely follows the history of its development strategies in the past half century. (2) •”incentives matter” (fiscal decentralization and realignment of incentives towards growth-maximizing activities).

Similarly. In the rapidly industrializing coastal areas. In contrast. which granted preferential treatment to coastal areas. 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. The cost of cleaning up the environment problem may eat up a large portion of the gains from industrialization. many local governments provide preferential treatment to investors.Global and Political Economic Environment China’s Economy The open‐door policy. but left many interior provinces lagging behind. many local governments loosen their environmental regulations to allow polluters to operate as long as they generate lucrative revenues for the local government. The inter‐juridical competition is a key contributing factor to the increasingly serious environmental problems. the degree of water pollution and industrial waste hazard is alarming. fiscal decentralization policy promoted local government officials to develop their own economies. Resenting this unfair treatment. the compensation to farmers was often far below the market level. they are more likely to levy heavy taxes on existing enterprises. and land disputes have become a breeding ground for social unrest all over China (Yu. 2006b). many relocated farmers filed petitions to the upper level government for help. such as free land. has helped the coast to better exploit its comparative advantage in the international markets. Assignment No: 1 P a g e | 10 . 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. In order to attract investment. In the process of procuring farming land for industrial or other commercial use. Consequently. such as Jiangsu Province and Zhejiang Province. Their local revenues are sometimes barely sufficient to cover the salaries of civil servants on the public payroll. the successful development strategies mentioned in the above section also have some deleterious side effects. How to make local government officials accountable has become an increasingly important issue. In order to attract investment. worsening the business investment environment. 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. 2003). In summary.

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 .