The Chinese Economy: Introduction

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The Chinese Economy Introduction

• Lecturer Zhigang Li

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Organization and Evaluation of the Course

• Each student should choose a topic (or a
  question) he/she is interested in.
• Students with related interest will be grouped
  together. We shall meet one week ahead and assign
  readings for each group. Students would then need
  to present in the class. The lecturer and the
  rest of the class will participate in the
  discussion.
• Each groups performance will be graded.
• Each student will also be graded by others
  (anonymously) in the same group for his
  contribution.
• By the end of the semester, each student should
  submit an essay. Requirement will be announced
  later.
• A closed-book final exam will test your
  understanding of course materials.
• In-class 30. Essay 30. Final 40.

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Possible Topics

• Economic structure
• Demographics
• Institution
• Important policies
• Fiscal structure
• Legal structure
• Important markets goods, labor, finance
• Inequality
• Growth performance
• Risks
• Living quality

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China
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China
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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. (dependence on trade and
  energy?)

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Ming-Ching Transition
End of Ching
Yuan-Ming Transition
Sung-Yuan Transition
Sung Dynasty
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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.

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Important Years

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

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Questions to address

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

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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).

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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.

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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.

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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)

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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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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Height
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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.

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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

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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.
• Relatively high human capital
• High literacy rates
• A small university system
• Skilled individuals trained abroad

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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.

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How was the Big Push Strategy Achieved?

• The command economy system

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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.)

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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.

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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).

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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

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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.

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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

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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.

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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.

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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.

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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.

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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

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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.

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The Cultural Revolution (1967-1969)

• The Cultural Revolution was not a particularly
  important event in the economic sense.

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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.

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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.

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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.

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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.

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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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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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Is China the only country that has been growing?

• No. Many other economies have been growing
  rapidly in the past decades.
• Other east Asian economies
• But China is the one that grow the fastest and
  for the longest period, in terms of GDP per
  capita.
• China over 30 years of growth with high growth
  rates.

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From Chenggang Xus Note
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Why many underdeveloped economies have been
growing rapidly (despite their drastically
different institution)?

• Spillover of wealth from developed economies.
• Spillover of modern technology.

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Why China has grown faster and for a longer
period than other developing economies?

• This is the so-called China Puzzle.
• Key question Is the rapid growth of China a
  long-term or short-term phenomenon?
• Long term Driven by continuous improvement in
  technology (hard and soft)
• Short term
• Due to one-shot reform
• Due to mean-reverting