Transcript socialist market economy

Variants of Transition among
Former Socialist Economies
Chapter XV
China’s
Socialist Market Economy:
The Sleeping Giant Wakes
1
Chinese Economy

World’s Largest Population

One of the world’s rapidly growing economies

Continues to be ruled by an authoritarian
Communist Party
→ An important case of economic
transformation
2
Chinese Economy

What is China’s secret?

China occupies a central position geographically,
historically and culturally in East Asia, where
many countries that have followed the model of
Japan, have experienced rapid industrial growth

While China was behind many industrialized
countries for a long time, starting in 1970s, China
has awakened and emerged as a regional leader

Given its military power, China might become a
full international superpower
3
Chinese Economy

Under Chairman Mao Zedong, China pursued
egalitarianism and regional self-sufficiency

The country side was organized into large
communes corresponding to former town and
village clusters

Great Proletarian Cultural Revolution (1966-69)
4
Chinese Economy

Town and village enterprises (TVE) and rural industrial
enterprises owned by local units of government

These entities are free from central planning and operate in a
competitive market context, many exporting goods abroad
through laissez-faire Hong Kong or via specific foreign capitalist
firms

Export sector outperforming

The strictly privately owned sector in Special Enterprise Zones

This dynamic TVE form is the unique innovation of China’s selfproclaimed socialist market economy
5
Chinese Economy

Confucianism emphasizing loyalty within
families and toward state authorities, hard
work and morality

Familism and groupism → common
characteristics shared by the rapidly growing
East Asian economies

The post-Mao renewed emphasis on family
units led to the household responsibility
system in agriculture after 1978
6
Historical and Cultural Background:
Culture and Religion

Three major religions have coexisted
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
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Taoism and
Confucianism are Chinese in origin
Buddhism came originally from India
7
Historical and Cultural Background:
Culture and Religion
Taoism

Taoist conception of universal harmony → followers of the
TAO, “the way” to seek harmony with nature and immortality

The key to this search is wu-wei, “no action” a Chinese term
used to describe nirvana when Buddhism came to China

Tao is famous for paradoxical formulations such as “Do
nothing and all will be done.”

It has been associated with a laissez-faire orientation and was
used at the beginning of the Han dynasty (206 BC)
8
Historical and Cultural Background:
Culture and Religion

Taoism was declared the state religion in the
5th century
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Taoism and Buddhism were popular together
but were suppressed by Confucianism

By the time of the Communist Revolution in
1949, Taoism had mostly disappeared as an
organized religion
9
Historical and Cultural Background:
Culture and Religion

Confucianism
If Taoism, with its harmony and immortality is the yin
(female) of Chinese culture, then Confucianism is
the yang (male), given its moralistic scholarmandarin-bureaucrats administering the empire with
doctrine of the scholar in power

Chinese Confucianism centers on ren, usually
translated as “benevolence” or “humaneness”

Emperor is the “son of heaven” who should rule
benevolently and in return should be obeyed loyally
10
Historical and Cultural Background:
Culture and Religion

Loyal obedience extends to family relations: Son
obeys the father and the wife obeys the husband

Although Confucianism later developed into an
authoritarian state-centered doctrine in later
dynasties, it advocates ruler with almost Taoist,
laissez-faire

An older Chinese philosophy, that is truly
authoritarian, legalism which requires absolute
power of the state was incorporated into the neoConfucianism synthesis of the 12th century
11
Historical and Cultural Background:
Culture and Religion

In the 9th century, Confucianism became the
official Chinese state religion

Official Confucianism opposed commerce,
industrialization and relations with the
outside world and supported the ideal of
China as the self-sufficient kingdom
12
Historical and Cultural Background:
Social Structure and Land Tenure in Traditional China

Confucius supported equal division of land
among patriarchal families

Family land ownership with division among all
male heirs predominated

The basic social pattern emerged of a town
with a group of villages functioning as an
essentially self-sufficient unit
13
Historical and Cultural Background:
Social Structure and Land Tenure in Traditional China

The Confucian ruling class was the scholargentry

Civil service examinations for the state
bureaucracy

The lower levels of the bureaucratic elite
ruled the countryside in the small towns as
the emperor’s agents

Class mobility was reduced
14
Historical and Cultural Background:
The Dynasty Cycle
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

Han (206 to 220 BC)
Tang (618-906 BC)
Song (960 to 1275)
Yuan (1276 to 1367)
Ming (1368 to 1644)
Qing (1645-1911)
15
Historical and Cultural Background:
The Dynasty Cycle
Recurring pattern of all dynasties
 Initially attacks corruption
 Builds up the economy
 Follows Confucian virtues
 Strengthens the country
 Gradually corruption increases
 Imperial attention to government decreases
 Taxation levels, famines, rebellions, and local
warlord activity increase until the dynasty falls
16
Historical and Cultural Background:
The Dynasty Cycle
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This dynasty cycle proved that China was an
unchanging society
Marx explained the Chinese lag by the Asiatic
mode of production, an economic system that
existed outside of his historical materialist
categories
Marx saw state bureaucracy suppressing
capitalism and class struggle dynamics, thus
leading to the stagnant economy and society
that characterized much of Asia
17
Historical and Cultural Background:
From Empire’s End to Communism’s Victory

Opium Wars (1839-1842) took place between Britain and China

This dispute was around the Opium trade which was seen from
two different sides

Chinese Emperor had banned opium in China due to its negative
effects on the population

British, however, saw opium as an ideal good to trade, as it
would help to balance the huge trade deficit with China

After the Opium Wars, China experienced one defeat after
another—France, Germany, Russia, US, and Japan

Britain established treaty ports where their national merchants
operated free of Chinese jurisdiction
18
Historical and Cultural Background:
From Empire’s End to Communism’s Victory

Anti-foreign, anti-imperialist movements and
Westernizing upheavals against the Qing dynasty
erupted

In 1911 Qing dynasty was overthrown

A period of warlordism ended when Chiang led the
nationalist Guomindang to power in 1928

He received Soviet and Communist support, but
later turned down the Communists

Communist in return followed Mao Zedong in 19351936 and they fought a peasant-based guerilla war
19
Historical and Cultural Background:
From Empire’s End to Communism’s Victory

After WW II, Chiang did not carry out land reform

Chiang’s nationalist forces were defeated by Mao’s
Communist forces in Manchuria and swept down out
of the northeast

In October 1949, Chiang’s forces retreated to
Taiwan where they ruled until 2000

While Mao’s Communists established the People’s
Republic in Beijing
20
Maoist Economic Policies:
The Ideology of Maoism

Maoism was the main Communist rival to the Soviet
style model during the 20th century

Origin of Maoism was the May Fourth Movement of
1919, which protested turning Chinese territory over
to Japan in the Versailles Treaty

Chinese Communist Party was founded in 1921
under the leadership of Mao

Mao formulated his doctrine of relying on a mass
peasant base, which differed from Stalin’s position
21
Maoist Economic Policies:
The Ideology of Maoism

Differences between Maoism and Stalinism
Its emphasis on developing the rural economic base and
maintaining population in the countryside

Its emphasis on egalitarianism and use of moral incentives
rather than material incentives

Its anti-bureaucratic attitude that peaked during the Great
Proletarian Cultural Revolution when Red Guards denounced
bureaucrats

Its greater opposition to traditional culture
 Mao wanted to extirpate the past by campaigning against the four
olds (old customs, old habits, old culture, and old thinking)

Its emphasis on regional decentralization of economic
control
22
Maoist Economic Policies:
Implanting Socialism and the Stalinist Model, 1949-1957

Inherited a devastated economy

Rely on support from centralist and liberal groups

Communist regime moved slowly, emphasizing
ending hyperinflation and redistributing land to
individual peasants

Collectivization of agriculture
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Nationalization of industry and trade
23
Maoist Economic Policies:
Implanting Socialism and the Stalinist Model, 1949-1957

Granted land to all peasants

Established localized aid teams in 1950
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Towns became the communes
Villages became brigades
Subvillage or smaller village groups became production
teams
Individual households were at the bottom of this economic
division
Fully nationalized industrial enterprises
24
Maoist Economic Policies:
Implanting Socialism and the Stalinist Model, 1949-1957

First Five Year Plan (1953-1957) following
Stalinist line → reliance on Soviet economic
advisers

Command central planning → heavy
industrial buildup, especially in northeastern
Manchuria

Steel, iron, cement production increased
25
Maoist Economic Policies:
Great Leap Forward (1958-1961)

A cutoff of Soviet aid and a poor harvest in 1957
triggered the Great Leap Forward in 1958

Goal is to develop rural-based industrialization using
traditional technology to produce inputs and
mechanization for agricultural production in
decentralized communes, a policy labeled “walking
on two legs”

Industrialization by making use of the massive
supply of cheap labor and avoid having to import
heavy machinery
26
Maoist Economic Policies:
Great Leap Forward (1958-1961)

To achieve this, Mao tried to merge the existing collectives into huge
People's communes → 25,000 communes had been set-up at the
level of the traditional market towns, each with an average of 5,000
households

Communes were relatively self sufficient co-operatives where wages
and money were replaced by work points

Mao saw grain and steel production as the two key pillars of
economic development

Encouraged the establishment of small backyard steel furnaces in
every commune

However, high quality steel could only be produced in large scale
factories using reliable fuel such as coal

Mao did not consult expert opinion
27
Maoist Economic Policies:
Great Leap Forward (1958-1961)

Poorly planned capital construction projects, such as irrigation
works often built without input from trained engineers

Wrong methods were followed in agriculture
 For example, deep plowing (up to 2m deep) was
encouraged on the mistaken belief that this would yield
plants with extra large root systems

Agriculture went bad → leading to famine, 30 million people
died of starvation

Steel production went bad

The plan did not achieve the intended results, led to
widespread economic dislocation, and is widely regarded both
in and out of China as a policy disaster
28
Maoist Economic Policies:
Period of Adjustment (1962-1965)

In 1962 Mao accepted the blame for the GLF under the
pressure from Party General Secretary Deng Xiaoping and
reinstituted the central planning

The accounting unit for income distribution and distribution
was lowered from the communes to the production team

Development priority reversed from heavy industry to
agriculture with a light industry

Both agriculture and industry grew solidly

Famine disappeared

Deng was a crucial figure in this policy shift
29
Maoist Economic Policies:
Great Proletarian Cultural Revolution (1966-1978)

In 1966, Mao threw the country into turmoil again by initiating
an upsurge by Chinese students and workers against the
bureaucrats of the Chinese Communist Party (CCP)

Intellectuals and bureaucrats were sent to the countryside or
prison for reeducation

On August 8, 1966, the Central Committee of the CCP passed
its "Decision Concerning the Great Proletarian Cultural
Revolution"

Between 1966 and 1968, Mao encouraged Red Guards and
rebels to take power from the Chinese Communist Party
authorities of the state and to form revolutionary committees
30
Maoist Economic Policies:
Great Proletarian Cultural Revolution (1966-1978)



Mao died in 1976 and in 1977 Deng reentered the
leadership
Deng emphasized market economy
Deng implemented four modernizations:



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agriculture,
industry,
science and technology
military
The strategy for achieving these aims of becoming a
modern, industrial nation was the socialist market
economy
31
Maoist Economic Policies:
Great Proletarian Cultural Revolution (1966-1978)

Substantial decentralization to local government
units of planning administration

Fear of a soviet invasion led to the Third Front
policy, emphasizing major industrial expansion in
southwestern provinces

Local areas built input supply systems for industrial
production, building on foundations laid out during
the GLF and later used for TVE development
32
Dengism and Move to a Market Economy,
1979 to the Present: The Reform Process

Gradualist market-oriented reforms

Initial changes affected agriculture and laid the foundation for
establishment of Special Enterprise Zones, which opened
China to outside economic influences

In 1981 CCP committed itself to eliminating corruption and
reforming itself

In 1984 came major enterprise reforms

In 1985 many military hardliners were removed from the party

In 1986 student pro-democracy demonstrations
33
Dengism and Move to a Market Economy,
1979 to the Present: The Reform Process

The Tiananmen Square protests of 1989 started from the
middle of April 1989, triggered by the death of Hu Yaobang,
the stepped down party general secretary

Officially, Deng got retired in 1989 and left the political scene
in 1992

China, however, was still in the era of Deng

He continued to be widely regarded as the "paramount
leader" of the country, believed to have backroom control

Deng was recognized officially as "The architect of China's
economic reforms and China's socialist modernization"
34
Dengism and Move to a Market Economy,
1979 to the Present: Reforms in Agriculture

Agricultural reforms introduced in 1978 included

Recognition of property rights

Restoration of the right to private plots and respect for
household boundaries

Allowance of free market rural bazaars

Loosened restrictions on crop specialization

Increase in state purchases of agricultural commodities
along with price increases for these commodities

A full shift to material rather than moral incentives
35
Dengism and Move to a Market Economy,
1979 to the Present: Reforms in Agriculture




In 1979 came household responsibility system →
households became the principal unit of account
Elimination of the communes
Introduction of two-tier price system → households
could freely sell anything they produced above their
quota
This system allows households to lease equipment
from higher units and to engage in long-term
transferable leases for the right to use land
36
Dengism and Move to a Market Economy,
1979 to the Present: Reforms in Agriculture

Response to increased incentives

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
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provided by changed pricing policies, loosened restrictions
on crop specialization, greater interregional trade caused
by relaxation of the self-reliance doctrine
was a dramatic increase in output
China’s agricultural improvements were substantial
Food consumption patterns now resemble those of
middle-income countries more than those of poor
countries
Ending famine in the world’s most populous nation is
an important step
37
Dengism and Move to a Market Economy,
1979 to the Present: Reforms in Agriculture

However, there are limits of Chinese
agriculture

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

The small size of farms
Disinvestment in infrastructure
Unfavorable terms of trade as prices were freed in
other sectors
A long-term decline in amount of cultivated land
38
Dengism and Move to a Market Economy,
1979 to the Present: Enterprise Reforms

Major enterprise reforms came in 1984 that allowed firms to
replace plan targets with responsibility contracts that enabled
them to dispose of any surplus beyond a small contracted
production and financial obligation

The dual price system created a market economy beyond the
contracted portion with a declining share in central state
owned enterprises

Communes have been disbanded, a remnant of them persists
as town and village enterprises (TVEs), technically known as
rural collectives

These TVEs are rural industrial enterprises owned by local
units of government
39
Dengism and Move to a Market Economy,
1979 to the Present: Enterprise Reforms

TVEs managers are appointed by the next higher
unit of government

Many of these entities existed in Mao era as
commune enterprises

They face hard budget constraints and operate in
competitive markets

The earnings of TVEs go not only to enterprise
wage but also to local public service
40
Dengism and Move to a Market Economy,
1979 to the Present: Enterprise Reforms

Compared to State-owned enterprises TVEs have
greater flexibility and freedom from central control

TVEs have advantage over private firms because of
their lower tax rates

Many TVEs operate as subcontractors for foreign
private firms

Other TVEs are direct extensions of former suppliers
of regionally self-sufficient Maoist rural industrial
complexes
41
Dengism and Move to a Market Economy,
1979 to the Present: Enterprise Reforms

TVEs are free from central planning and operate in
a competitive market context

TVEs export goods abroad through laissez-faire
Hong Kong or via specific foreign capital firms

This dynamic TVE form is the unique innovation
of China’s self-proclaimed socialist market
economy

TVEs were hit by a wave of privatization after 1993
42
Dengism and Move to a Market Economy, 1979 to the
Present: Special Economic Zones and Foreign Trade

In the days of the emperors, foreign traders were restricted to
specific ports → paid tribute to the emperor and remained
separate from Chinese society

Now the ports that are established for SEZs follow relaxed
rules as long as their operation fits with traditional Chinese
approach

A law establishing ground rules for joint ventures was passed
in 1979

In 1980 four cities and in 1984 fourteen more were selected
ports as SEZs and allowed to have Economic and
Technological Development Zones

Restrictive rules on economic activities were relaxed

Foreign investment in these areas were encouraged
43
Dengism and Move to a Market Economy, 1979 to the
Present: Special Economic Zones and Foreign Trade

SEZs became engines of growth and expansion

Foreign investment has poured in and exports have poured
out

SEZs cities have boomed and total Chinese trade rose

China joined WTO in 2001, after 15 years of negotiations

Agreed to lower tariffs and abolish market impediments after it joins the
world trading body

Chinese and foreign businessmen gained the right to import and export
on their own - and to sell their products without going through a
government middleman

The agreement also opens new opportunities for U.S. providers of
services like banking, insurance, and telecommunications
44
Dengism and Move to a Market Economy, 1979 to the
Present: The Distribution of Income and the Standard of
Living

Under Mao China had one of the most equal income
distributions in the world

With the Dengist marketization came greater
inequality from late 1970s on

Great class equality within local units in both villages
and urban areas

Offsetting this local class equality were urban-rural
and broader coastal-interior regional inequalities
45
Dengism and Move to a Market Economy, 1979 to the
Present: The Distribution of Income and the Standard of
Living

Income inequality increased in 1990s due to









Relative decline of more egalitarian state-owned sector
Inflation
Impacts of foreign trade
Regressive rural fiscal transfer policies
Commercialization of urban housing
Increases in rent-seeking activities
Increases in monopoly power and corruption
Reduction of urban subsidies
Transfers of benefits to private property
46
Dengism and Move to a Market Economy, 1979 to
the Present: The Present
Despite recent economic success China faces severe
economic and political problems

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


Income Inequalities
Threat of major energy/environmental crisis
Threat of extreme oscillations between inflation and deflation
Dealing with accumulating bad debts in the state-owned
banks
Problem of managing laissez-faire Hong Kong since its
absorption by China in 1997
Threat of separatism in poor western provinces populated by
minorities
Continuing political conflict over democratization →
Tiananment Square
Absorbing increasing number of migrants
47
Hong Kong, Taiwan and Mainland China:
Hong Kong

Former British colony of Hong Kong is one of the
world’s most laissez-faire market capitalist
economies

Succeeded as a leading newly industrializing
country





Absolute free trade
No regulation of capital flows or labor markets
Few regulations on enterprise formation or activity
No government ownership of business
Low flat income tax rate
48
Hong Kong, Taiwan and Mainland China:
Hong Kong

Hong Kong has been serving as an
international trade entrepot between China
and the rest of the world, and British-owned
banks and trading houses dominated its
economy

Four vital functions for Chinese economy:

Major trading partner, financier, middleman,
facilitator and its major source of foreign
investment
49
Hong Kong, Taiwan and Mainland China:
Hong Kong

For 50 years Hong Kong is to have practical
autonomy over local politics and its economic
system, but defense and foreign policy are to
be controlled by China

Its role as a facilitator is important for
introducing market capitalist practices and
advanced technologies into China
50
Hong Kong, Taiwan and Mainland China:
Taiwan

Taiwan’s economy more closely resembles those of
Japan and South Korea because of its indicative
planning and government ownership of enterprises

A market capitalist economy with a Confucian
tradition

Small-firm development of electronics and hightechnology exports
51
Hong Kong, Taiwan and Mainland China:
The Three Chinas Compared

Hong Kong






Small and urbanized
Market capitalist
Laissez-faire
High in income
Less equal distribution of income
China



Huge and rural
Largely socialist despite widespread marketization and
increasing privatization
Poorer but more egalitarian despite recent inequality
increases
52
Hong Kong, Taiwan and Mainland China:
The Three Chinas Compared

Taiwan

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
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
Closer in size to Hong Kong
A substantial rural agricultural sector
Lies between China and Hong Kong in degree of
economic state guidance
Closer to Hong Kong in income level but more
equal than china in income distribution
Behind Hong Kong in per capita income
Ahead of Hong Kong in educational levels and in
the technological level of its exports
53
Hong Kong, Taiwan and Mainland China:
The Three Chinas Compared

They all share a common Chinese culture,
Confucianism

They all had authoritarian political systems,
although there has been a recent trend
toward democratization
54