18 The People’s Republic of China
BOX 1
ChinaArea (Thousand sq. km.) Currency
Population 2000 (millions)
Population Growth Rate GNI per capita 2000
GNI per capita PPP
GDP Growth 1990-2000
Inflation Rate (1995 – 2001) / 9,597
Yuan
1261
1.1%
$840
$3,940
10.3%
--
16%
49%
34%
Value Added as %
of GDP 2000 / Agriculture
Industry
Services
% of GDP / General Government Expenditure
Exports / 15%
22%
INTRODUCTION
CENTRAL PLANNING, 1952–1959
The Soviet model was followed with reliance placed on five-year materials balance plans.
Soviet planners and technicians were imported and a formal planning apparatus put into place.
In the early 1950s the Chinese economy was by no means in a parallel position to that of the Soviet Union, because:
China’s population was much larger
Communications systems were much less well developed -- Poor flow of info to center.
Chinese economy was not as highly unified and integrated as that of the Soviet Union.
Poor transportation and the historically high degree of regional self-sufficiency (exacerbated during the period of “warlordism” in the 1920s and the struggle with the Japanese) meant that gains from centralizing the economy were much more difficult to grasp.
Much power remained in the hands of municipalities and provinces, and even the prefectures and townships.
At the height of planning in China, only 500 commodities fell under mandatory central control, in contrast to the more than 20,000 commodities that were part of the Soviet material balance plans.
THE GREAT LEAP FORWARD, 1958–1961
· The end of the first five-year plan in 1958 coincided with reforms to the planning system that recognized the impracticability of “taut”[1] central planning in the Chinese economy,
· Superceded by the Great Leap Forward, a political initiative to harness the ideological fervor of the Chinese population to the task of raising industrial output.
· At the same time as China continued to pour investment into capital-intensive heavy industry, Mao and the leadership exhorted the population to increase the output of basic industrial goods through labor-intensive enterprises in rural areas. This approach of using both capital- and labor-intensive technologies to produce the same goods was characterized as “walking on two legs.”
· Mao Tse Tung urged a sharp increase in steel production through the development of small-scale furnaces, and it is estimated that some two million small furnaces were established during the first two years of the Great Leap Forward, employing some 80 million people on a full or part-time basis. Official statistics show that industrial output grew sharply at the outset of the Great Leap Forward; net material product was up by 22 percent in 1959 alone, but it soon became apparent that this was being achieved at great cost, and much of the growth was actually an illusion.
· After an initial period of feverish activity, the incentives of revolutionary fervor and rhetoric cooled.
· The countryside became scarred and the environment adversely affected.
· Soviet advisors were frustrated by what seemed a perverse rejection of socialist rationality, and in an atmosphere of growing antagonism between the two nations, technical assistance was suspended in 1960.
· Net material product in China fell sharply in 1961 and 1962, but greater stability was reestablished in 1963 and a period of relative calm saw a rise in industrial output.
· Continuing investment in heavy industry helped the rebound, and industrial output rose sharply between 1963 and 1966. Chinese technocrats filled the void left by the departing Soviets, pursuing central planning once more, though with a greater degree of pragmatism.
· The high degree of provincial autonomy left local governments free to use their flexibility to increase output in whatever way they chose.
THE CULTURAL REVOLUTION, 1966–1970
· Mao’s Proletarian Cultural Revolution.
· Exactly what prompted the Chinese leader to embark on that course at that moment in history is still open to dispute.
· In part he seemed convinced that only complete rejection of western influence would enable Asia, including China, to be economically self-reliant.
· He was also genuinely convinced that Stalinist economic management had resulted in a new structure of class and privilege as obnoxious to him as the old.
· Finally, and perhaps decisively, he felt a need to strengthen his own political position vis-à-vis the technocrats and bureaucrats.
· The Cultural Revolution resulted in Chinese society being turned upside down. Bureaucrats, planners, and technocrats were stripped of authority and sent off to the countryside for “political reeducation,” while power shifted to radical political cadres.
· There were considerable economic costs to the turmoil. Again the economy lurched into a sharp recession with material output falling by about 15 percent in both 1966 and 1967; it rebounded again in the last years of the decade as some form of normality returned.
· By the beginning of the 1970s it was clear that the era of Mao and Chou En Lai was nearing its close, so political factions began maneuvering for power.
· On the left, the gang of four, led by Mao’s wife, tried to sustain the Cultural Revolution.
· On the right, a moderate and technocratic leadership sought the restoration of rule by bureaucracy and party. Both Mao and Chou died in 1976 and nominal power passed to Mao’s chosen successor Hua Qua Feng.
· However, by this time the moderates were in ascendance and Deng Xiaoping, a highly capable administrator, was rehabilitated from the indignities inflicted on him during the Cultural Revolution and restored as party leader.
THE FIRST PHASE OF REFORM, 1978–1993
Deng resolved to find new approaches to promote growth. December1978 saw a profound shift in the direction of the Chinese economy as the Central Committee of the Communist Party of China (CCP) issued a communiqué that, in effect, launched the modern period of reform.
· Agricultural Reform
· Grain output per person employed had risen by less than 10 percent during a 25-year period, despite considerable expenditures on infrastructure, informational outreach, and factor inputs, especially fertilizers.
· Under collectivization, agricultural production had been organized into communes (typically with a population of about 40,000 people). These were further subdivided into brigades and production teams. Decisions about what to grow and how to grow it were passed to the communes from superior political units – inflexible.
· Worker remuneration was generally through sharing the net production of the brigade on a per worker basis taking little account of individual or family productivity --- free rider problem.
· Households were allowed small plots for the own cultivation, from which the surplus could be sold in the local markets, and productivity was in general much higher in these small niches in the system.
· The reforms that began in 1979 were largely the result of local initiative and were
· Initially this took the form of enlarging the size of the private plots and increasing the procurement price that the state paid for crops that were produced privately -- reforms evolved into the household responsibility system (HRS), which became the dominant arrangement in agriculture after 1982.
· Under HRS quite large plots of collectively held land were leased to households for a fixed period of time, initially 15 years for annual crops and up to 40 years for tree crops. In return for tenure, each household was responsible for providing a share of the production team’s output quota based on plot size.
· Production in excess of this “contract” could be sold either on the free market for what it would fetch or to the state at negotiated prices. By 1984, 93 percent of China’s cultivated land was contracted to households, but,
· it was not until 1985 that the state passed legislation formally sanctioning it.
Effect of Reforms
· Countryside became prosperous.
· The state response was to cut the procurement prices for grain.
· Farmers responded by shifting resources out of grain production and into more profitable, less regulated commodities like vegetables and meat. Grain output fell as a result in the mid-1980s.
· The government’s response was to raise the procurement prices of grain once more, but this time it tried to avoid the fiscal consequences by increasing the prices paid by urban consumers.
· This step toward price liberalization led to the ultimate deregulation of the grain market; by May1993 grain prices were decontrolled in about 80 percent of the country and prices determined by the interplay of supply and demand.
The Rise of Rural Enterprise
township and village enterprises (TVEs) as the most dynamic sector in the Chinese economy.
TVEs are industrial activities that were initially collectively owned by the communes.
Although they are collectively owned, TVEs are much more akin to western firms than the state-owned enterprises (SOEs) for several reasons:
1. They face a hard budget constraint and are seldom bailed out by government subsidy --- banks are inclined to extend credit only on strictly economic terms.[2]
2. As new enterprises, TVEs fell outside the scope of the rather rigid planning system and were from the beginning unfettered by mandatory controls. They enjoy, therefore, considerable freedom of initiative over what to produce and how. Large pent-up demand for light industrial products both for the domestic market and overseas. TVEs were able to exploit this vacuum.
3. Unlike SOEs, TVEs had no captive market for their products and from the start success depended on identifying demand and meeting it with quality products. In both domestic and overseas markets strong forces of consumer sovereignty were at work, which encouraged an emphasis on quality and product development that was absent in the state sector.
4. TVEs were allowed to sell their products at market prices, and given the fact that they were operating largely in competitive markets, this implied a continuing pressure to contain costs and advance productivity.
5. TVEs were not encumbered by the social expenditures required of state enterprises. In common with many socialist countries, SOEs in China were responsible for a range of social services including childcare, education, and health care that raised labor costs.
6. TVEs were also able to be much more nimble in their employment practices(hiring and firing) and were able to establish performance-based compensation systems, which maximized individual incentives and raised productivity.
7. TVEs are allowed to retain profits and keep them within the enterprise as investment. Initially the TVEs were assisted by concessional tax treatment that was helpful in building capital in the “infancy” stage.
Particular features of the Chinese economy under planning also favored growth of TVEs :
1. The concentration on heavy industrial growth through the state owned enterprises had led the government to neglect the light industrial sector. This presented a wide window of opportunity in light industrial production, through which the relatively nimble TVEs quickly, and profitably, moved.
2. The rise in agricultural productivity and the high birthrates of the 1960s had left large reserves of labor in the rural communes. The extension of educational opportunities, especially for women, under communism had created substantial human capital.
3. The high degree of provincial autonomy and the concern of local governments to promote economic development (in part motivated by the need to absorb surplus labor) meant that few impediments were placed on TVE growth, and many incentives were offered at the local level.
Starting from a very low base at the beginning of the 1980s, the emergence of TVEs had a rapid impact on China’s economy. By 1996, there were some 23.3 million TVEs within China, employing more than 135 million workers, or about 20 percent of total national employment. The rural enterprise sector as a whole accounted for only 19.2 percent of industrial output in 1978, but this had risen to about to 50 percent by 1996.
Recent years a strong trend toward the privatization of collectively owned TVEs, and the share of truly collectively owned enterprises has been falling, and along with it the share of employment.
The collectively owned enterprises are being converted into joint stock enterprises, partnerships and proprietorships. Perhaps more ominously, employment in the rural enterprise sector seems to have peaked at the 1996 level, and has fallen in successive years since, down to less than 125 million persons in 1999. It will create a body of unemployed or under-employed migrants. This is happening already and the measured plus disguised unemployment may be as high as 80 million persons.
REFORMING STATE-OWNED ENTERPRISE
Although the TVEs are the bright star of the Chinese economy, sustained economic development depends to some degree on successful reform of the state-owned enterprises (SOEs).
These predominantly heavy industrial enterprises were once seen as the key to China’s industrial future and represented economic security to the masses, a job with an SOE was by and large guaranteed for life, usually carried housing benefits, and was often referred to as an “iron rice bowl.”
The state-owned sector still accounts for the bulk of employment in the industrial sector. It still consumes over 40% of total industrial labor but manages to produce only about 25% of the output, reflecting serious inefficiencies.
This resulted in a scheme, known as the contract responsibility system (CRS), by which SOEs contracted for a four-year period to a production quota to be delivered to the state, and to specified financial payments it would make to the state in lieu of the profit remittances that the enterprises had formerly paid. Any output above the quota level could be disposed of by the enterprise at market prices. By 1988, 90 percent of all SOEs were operating under such contracts.
In parallel with these arrangements, and introduced during the same period of 1986–1988, a third responsibility system was introduced—the fiscal contract responsibility system (FCRS).
These arrangements, however, did provide great incentives for the enterprise.
Exceeding a quota was highly desirable as excess output could be sold for whatever the market would bear.
Moreover, since the marginal tax rate on profits was zero, and the dividends payable to government fixed, all the profit above predetermined fixed levels could be retained in the enterprise.
The industrial output of the SOEs rose sharply in response.