Transcript China I

China’s Gradualist Economic
Reforms
Great Leap Forward
Great Leap Forward
• Start with the history and the 1950s through
the 1970s
– This is the period when Mao (1893-1976) was
head of the government
– This was a period of one chaotic scheme to
another chaotic scheme
– Great Leap to the Cultural Revolution
• These policies produced stagnation, widespread
poverty, and even starvation at times
Great Leap Forward
• Starting in the 1950s, Mao pushed his Great
Leap Forward
GLF
• Official Chinese stats report this period with
glowing growth
– For example, ag output doubled in 1958
– The movement from ag to industry was often with
very harsh and nonsensical methods
The Social Changes Were Killing
The Farmers
• Literally
• These changes produced widespread famine
• One good change was in saving—China had
been a low saving country at the beginning of
the century
Split Between Soviets and Chinese
• The Soviet Union had been supplying much of
the technology to China in the early
communist period
• There was a political fallout in 1960 and China
no longer received the support from the
Soviets
• It took years for China to train its people to do
what the Soviets had been doing
Cultural Revolution
• This is mob rule by the Red Army of high
schoolers
Early and Mid-1970s
• After all of that chaos, the economy settle
from its craziness in the early to mid-1970s
• This was the time of the “Three Nothing
Enterprises”
– No administration
– No management
– No regulations
Trying To Cobble Stats
• Recently, some economists have been trying
to piece together some stats for the 50s, 60s,
and 70s.
• Still a huge amount of work needed
1978
• In 1978, China starts a huge number of
economic reforms that truly are the seeds of
today’s growth
• China’s economy has been growing at 8%-9%
per year
– This is just staggering
– At a growth rate of 9%, the economy will double in
8 years
• Their per capital from 1978 to today is like us from Civil
War until today
Largest Economy
• China will likely become the world’s largest
economy in the next couple decades
– The IMF has said that based on PPP, China is
already ahead of the US
How Can They Be So Large
• Remember that China has over 1.3 billion
people compared to the US with just over 300
million
– More than 4 time the population of the US
– World Bank estimates in 2008, was that the
standard of living in China is about 10% the US
level
– When China reaches a standard of living that is
25% - 30% of the US level, the overall size of
China’s economy will be larger than that of the US
Substantial Gains
• China’s rapid economic growth has produced
substantial gains for the standard of living for
its citizens
• Back in 1980, China had about 60% of its
population (600 million) living in poverty
– Less than $1 per day—this is the definition of
global poverty as used by the World Bank
– $1 is roughly the cost of basic subsistence
This level declined rapidly
World Bank Estimates That Poverty
In China Declined To:
• 64% in 1981
• 33% in 1990
• 10% in 2004
• Enormous gain in human welfare—the is the
largest and fastest movement out of mass
poverty that has EVER occurred
What China’s Growth Brings
Necessities
1985
2003
Household Refrigerator
1 per 100 households
46 per 100 households
Color Television Sets
4 per 100 households
94 per 100 households
Washing Machines
1 per 100 households
59 per 100 households
Students in Higher
Education
3 million
11 million
Fixed or Mobile Telephone
63 million
533 million
Length of Paved Roads
38.000 kilometers
208.000 kilometers
Length of Sewer Pipelines
32.000 kilometers
199,000 kilometers
Public Transport Vehicles
45,000
264,000
How Did China’s Economic Reforms
Unfold
• Starting in the late 1970s, after the death of
Mao, China took a new approach
• China had a gradualist approach to growth
• The simplistic view would be
– China gave up Communist central planning and
turned to the free market
– True, but fails to capture what China distinctive
about the changes
Economic Reforms
• What is surprising is how meek and gradual
the changes were
• In some ways a might be good to think about
what they have not done (compared to
Russia)
– The Communist economy of Russia was stagnant
– But it was stagnant at a much higher level of
industrial and higher level of human capital
– Russia also experienced the overthrow of the
political system
Economic Reform
– Russia had reasonably free elections in the 1990s
– Russia’s movement away from Communism
promoted privatization, freeing up of prices, and a
mass movement to markets
– China did not have the same industrial level
– China did not privatize
– It did not immediately eliminate central planning
– Some prices were freed up, but many were still
under government control
– China’s communists were still in control
Russia v. China
• Russia was a big bang with lots of activity in a
small period of time
• China’s movement was talk, but the
movement was not so fast
– Four Modernizations
• Agricultural, industrial, science and technology, defense
• This was talk—the actual changes were much smaller
• Just 3 changes at first
– Freeing up agricultural
– Shifting workers to township and village enterprises
– Opening up to foreign trade
Turning the Farmers Loose
Farmers
• Starting in the 1970 the farmers started to
bribe their way out of the system
• By 1978, the Chinese government endorsed the
household responsibility system
Examples of Growth in Agriculture
• In 1978, less than 10% of agricultural
commodities were sold markets
• By 1990, the number was 80%
• Agricultural was 30% of GDP in 1980
• By 1995, it was down to 21% of GDP
What Happened?
Examples of Growth in Ag
• Agriculture had been growing less than 3% a
year in the 1970s
• The growth rate zoomed to more than 6% a
year immediately after the new policy
• It did, however, slow down in the mid-80s
Where Did The Farmers Go
• The share of population in the cities went
from 18% in 1978 to 29% by the mid-1990s.
Many of these farmers went to township and
village enterprises
• These enterprises were often owned by the
township and sometimes individual—they
produced consumer goods—pots, pans,
plates, simple appliances
– Huge potential for these goods because they had
been neglected in the economy
Enterprises
• Township and village enterprises’ share of
GDP went from 13% in 1985 to more than 1/3
by the mid-1990s
– They were making about 40% of China’s industrial
output
– And growing at about 25% per year
Transition From State to Private
• Starting in the mid-90s there was a greater
movement toward privately owned companies
– Some were even foreign owners
• State firms made 78% of China’s output in
1978
• By the mid-1990s, state-owned firms were
making only 33% of output
Openness to Trade
Trade Zones
• The policies starting in the 1970s set up these
trade zones
– This allowed 1000s of companies to export and
import through the government company
Opened the Airlock
• Exports: 6-7% of GDP in 1980
• 20% of GDP in 1995
• How did this work so well?
– Foreign investors are behind only about 2% of
China’s total manu goods, but they were behind
about 30% of its manu exported goods—the
foreign investors were providing a link to the final
markets
Hong Kong and Taiwan
• Who better to help China—they know the
Chinese way and they already had links to the
outside world
• Helped to expand trade and investment very
rapidly
Not a Japan or East Asia Approach
• China’s early surge was not the result of an
increase in education
– Education had been decimated in the Cultural
Revolution
• Was not a result of higher levels of investment
– Investment level were high in China since the
1950s
• No targeting of particular industries
Early Reforms
• These early reforms were basically just
stepping aside
– Letting the markets act on their own
Chinese are not Entrepreneurial
• Many said that after decades of Communism,
that we should not expect the Chinese to be
entrepreneurial
Slowdown
• By the late 1980s/early 1990s these gradualist
approaches had reached some natural limits
• Time for a second wave of economic reforms
Second Wave
• Price control were gradually phased out of
China’s economy
– Started early, but really did not pick up speed until
the late 1980s
Share of Transactions at Market Prices
in Different Parts of China’s economy
1978 1985
1991
1995
1999
2003
Producer Goods
0
13
46
78
86
87.3
Retail Sales
3
34
69
89
95
96.1
Farm Commodities
6
40
58
79
83
96.5
Price Have Been Freed Up
• By 2003, most prices have been freed up
Price Controls
• In spite of my lack of trust of the Chinese
government, there is no doubt that the
economy is vastly more determined by market
prices than before
• From an econ perspective, I cannot emphasize
enough how important this is
Prices
• Prices are messengers in the economy
• They reveal what people want to pay for
goods
• They reveal what it costs to make goods
• They provide incentives to use less of what is
expensive and more of what is cheap
• They give incentives to firms to provide what
the people want
• Move toward efficiency and innovation
State-owned Enterprises
• At the end of the day, China could not let itself
sell them
• Started a process of state-owned in 2 markets
What Happened?
• The state owned enterprises were required to
buy a certain amount of inputs from state
firms at the government price
• And required to sell a certain amount of
output at the government price
• But they were also allowed to buy additional
inputs at the market price and allowed to sell
additional output at the market price—and
keep an increasing share of the profits
Safety Net
• You can think about this process as giving the
state-owned firms a safety net
– They had some inputs and outputs that would
guarantee them a certain level of profit
– But they were still oriented toward the external
market
– Interesting stratagem--avoids the outright collapse
of these firms (which would have happened
without subsidies) and avoids all the
unemployment
Government Monopolies
• This was also a period of eliminating
government monopolies
– If they wanted to sell in the market they needed
to compete with other companies
• In the early 2000s there were still a few
industries that were still owned by the
government
– Energy—oil , gas, & coal
– Utilities—tap water and electrical power
– Cars & tobacco
The Happened
• By the early 2000s, private sector firms
accounted for about 60% of China’s economy
– And that share was steadily rising
• Some state-owned firms had started to issue
shares of stocks that were traded
– But the total of the shares only accounted for 1/3
of the value of the firm
• Remember that many of the state-owned firms were
still heavily subsidized—2/3 of the investment was in
the state-owned
– Even as late as 2003, ½ of the investment was in the state
State-Owned
• Many of these loans were from state-owned
banks to state owned firms
– They were sucking up loans from the state-owned
banks and had no chance of repaying
• How to deal with this?
– Don’t—let the other companies outgrow them—
no need to reform if you are just letting them
slowly die
– The privates will take over, but it is tough since the
others get subsidies—kind of a mixed message
Does China Offer General Lessons
for Economic Reform
• Is this gradualist approach good?
• Good idea, but China has some distinct issues
– It has neighbors that are very hard to copy
– Relatively limited control by the government
– Entrenched political class
– Ardent political support for the reform
World Bank’s China 2020:
Development Challenges in the
New Century
• China’s economy could be described as a dry
prairie, parched by years of planning, awaiting
the first sprinklings of market reform
Others
• When other claim they want to follow the
Chinese approach, I will wait and see
– Do the want to allow farmers to own the land and
to free up prices
– Willing to let small enterprises flourish
– Welcome companies to buy foreign equipment
– Allow foreign ownership
– Selling on international markets
– Let large companies keep most of their profits
– Phase out price controls
– Move state owned companies into the stock
market