Transcript China

China
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China is of major interest within the field of comparative economic systems for several basic
and important reasons. To begin with, China is a country that adopted the Soviet model but
with interesting differences in practice. Moreover, as serious economic reforms emerged in
the late 1970s, the path of reform was very different from that of other transition
economies—beginning in agriculture and for the most part sustaining many elements of the
command era. However, China’s reform combined socialism with important elements of the
market and the aggressive use of foreign trade. These reforms have moved China to a
position of major importance in the global economy. In 2007 GDP $2.6 trillion, China is the
world’s forth largest economy after US, Japan and Germany. China enters a new century
with economic system resembling market socialism and yet with an historical background
different from the typical conceptions of market socialism. Thus as an economic system, as
an example of systematic change, and as a player in the world economy, China deserves
close examination.
I. The Setting
1.China:
a) is very large (about the same size as Canada, 3.7 million sq miles)
b) Population is huge and growing
•2007-1.3 billion (the largest population in the world and more than 1/5 of the world's population)
•major policy problem
c) Much of its land is uninhabitable or costly to cultivate (only 10% of
the land is suitable for cultivation)
•mountains and deserts
d) Much of its resource base undeveloped, e.g., large oil reserves only
starting to be exploited
e) A poor, developing country despite rapid growth (2007—$ 5,400 PC
income)
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f) A rich and very long heritage
• China has the oldest continuous culture in the world, with at least 4000
years of historical records.
– China was once the most technologically advanced, most populous, and (from
their point of view, anyway) the most civilized country in the world. The
Chinese are a very proud people, and often very nationalistic.
– Imperial China's political history is one of long periods of stable, autocratic,
and socially conservative dynasties, with a dynastic cycle that leads to collapse
of the state and periods of terrible chaos. The Chinese have no history of
democracy and a great fear of political disorder.
– Chinese economic history is full of lost chances. As Needham documented,
many of our most important technologies (printing, paper, clocks, gunpowder,
and paper money are just a few examples) were first invented in China but not
really put to economic use. Chinese fleets traveled to India and Africa before
the Europeans but these voyages were halted. The expansion of trade and
markets was repeatedly halted by government intervention. China did not make
the technological leap. While Europe was undergoing the Great
Transformation, China was in a period of decline.
• China did not respond to the European challenge, unlike the Japanese who
modernized their economy rapidly during the Meiji Restoration. In the Twentieth
Century, China began its revolutionary period.
– A revolution in 1911 toppled the last Qing emperor, a second and third
revolution helped to prevent the creation of a new imperial dynasty in 1916,
and the Northern Expedition in 1927 under Chiang Kai-shek (Jiang Jieshi) and
the Nationalist Party brought the country back under one government, albeit a
weak, incompetent, and corrupt one.
– Today China remains a poor country despite rapid growth (2008-GDP per
capita (PPP) $5,962; India $2,972; Pakistan-$2,644; Hong Kong-43, 922)
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2. The Early Years (1949-1976)
• The communist revolution in 1949 put Mao Zedong in
power. At the time of the revolution China was a classic
poor country with low PCI, significant population and
absence of institutions for econ development.
• Mao Zedong proclaims Chinese People’s Republic in
1949
• Mao takes leadership as chief of state
–
•
He created a strong central government and began a
process of determined Soviet-style industrialization.
Initial tasks
– collectivization of land
• Took the land from landlords and wealthier farmers
and placed it under the peasant control in communes
•
– nationalization of industry in preparation for
national planning
Followed typical (Stalinist) planned socialist model
– high priority to heavy industry, low priority to
agriculture
• aggregate investment 20% - 25% of national
product
• 85% industrial investment--heavy industry
• 8% state investment--agriculture
• by end of Mao period, industry share in
national output much higher than other
countries at similar level of development
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Collectivization of Agriculture
• First step was redistribution of land from the landlords to the peasants
in preparation for collectivization.
• Major farming equipment provided by village authorities
• Collectivization involved organizing households into large prod teams
• Led to the commune
– In the 1950’s the communist government organized 800 million rural
people into about 52,000 rural communes
The Rural People’s Commune
• Created during the Great Leap Forward (1958-1960)—a period of
massive resurgence of ideology that replaced rational decisions.
• Individual households organized into production teams (100-250 people)
• Production teams (7) combined to form brigades (16)
• Brigades combined into a commune (thousands of households in a
commune)
– The communes received production targets from the state and ensured
that these targets were met.
• Communes were controlled by the county
• County played major role in implementing the plans of the Ministry
of Agriculture and Forestry
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Vertical organization—structure of decision making
Organization of Agriculture Prior to the Reforms
Ministry of Agriculture and Forestry
County
Commune
Brigade
Production Team
Household
Each level above the individual hhld could hold land, and other production
materials under communal ownership, and each carried out a range of
production activities.
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• Individual’s Incentives in the Commune
– Individuals assigned work for which they earned
points as shares of residual income (revenue minus
expenses)
• This system of payments was highly arbitrary. The work
demanded vary regionally, seasonally and from commune
to commune. Contrary to any good incentive system,
peasants had little idea in advance what they would earn.
– This system resulted in problems:
• little incentive to work hard
– The workers were equally paid whatever efforts they
contributed.
• little incentive for individual initiative
• Impact
– Large reduction of agricultural production
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Nationalization of Industry
• There was a gradual transition from private to socialist
industry compared to the Soviet model
• Slow and orderly transfer from private to state ownership
– by 1956, 68% value of output by state owned
enterprises (SOE) and 16% by jointly owned (stateprivate) enterprises
• Planning mechanisms, priorities and enterprise
management are the same as Soviet Union
– 5 year plan, the plan is the law
• Problems (poor quality, shortages, inefficiency, etc.)
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Political and Economical Turmoil
• Chinese econ development through the 1970’s was characterized by
political and econ turmoil:
– Hundred Flowers Campaign (1956-7)—a relatively liberal period of open
discussion of the econ and political system.
• Mao unhappy with the Communist Party leadership
• invites constructive criticism from intellectuals (open discussion and
criticism of the system
• When the criticism came reveals deep hostility to the CCP
– Great Leap Forward (1958-1960)—an econ and social plan to use Chinese
population to rapidly transform China from a primarily agrarian economy
dominated by peasant farmers into a modern, industrialized communist
society.
• Was a period of massive resurgence of ideology that replaced rationality
• last vestiges of rural private property eliminated
• commune system established
– Agri was reorganized into massive communes of thousands of households
• attempt to initiate rapid growth and industrialization
• the plan did not achieve the intended results; economic disaster after
years of solid growth (economy collapses and does not recover to 1958
level until 1963)
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Mao stepped down as State Chairman of the PRC in 1959 but he retain Chairman of the
Communist party. The new State Chairman (Liu Shaoqu) and Deng Xiaoping (CCP
General Secretary) were left in charge to execute measures to achieve econ recovery.
Recovery from the Great Leap
• Recovery from Great Leap emphasizes
–less focus on output growth and more on quality and efficiency
–more balanced economic development (not only heavy industry but agri)
–modernization of agriculture
–Decentralization (local decisions)
In addition to organizational changes and policy shifts, the 1960’s witnessed a wide
spread educational campaign. There was an effort to educate the population in the ways
of Mao. This campaign laid the foundations of the Cultural revolution.
The Cultural Revolution
• Mao’s struggle to retake supreme leadership culminates in the Cultural
Revolution
–peaks from 1966 to 1969
–Include domination of ideology; revolutionary class struggle continues, involving
peasants class
–The Cultural revolution was an upheaval of ideas, an abandonment of much that had
preceded it. Put the Mao’s ideology as state ideology, to reeducate people in Mao’s
ideology
–The Cultural revolution had a dramatic effect on China’s educated classes
•lost generation of leadership as universities closed and students sent to the countryside,
students were sent to hard industrial labor or labor in the countryside
•
No increase in GDP from 1965 to 1970
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The early 1970’s was a period of recovery from the events of the cultural revolution.
However, there were some events that pointed to:
The End of the Stalinist Period
• Mao die in sept. 1976
• Gang of Four Trial, oct. 1976
– Mao’s wife and three others on the left tried to sustain the Cultural revolution,
arrested and discredited
– Stalinist thinking repudiated
– political maneuverings end in 1978 with rise of Deng Xiaoping
• By Chairman Mao's death in 1976, the Chinese economy was isolationist
and stagnant and Chinese material living standards had failed to improve
(though extreme poverty and outright starvation was reduced, and average
life expectancy had increased dramatically).
– Inefficient farming communes (Most Chinese lived on inefficient farming
communes)
– state monopoly (Industrialization had mostly affected the cities, and the state
held a virtual monopoly)
– Inefficient state-owned factories (Inefficient state-owned factories relied on
direct state funding and produced shoddy products, and turned over all their
profits to the state; State banks were created to help finance state
expenditures)
– Private ownership and incentive was virtually nonexistent.
• reform period begins
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II. Transition in China
1. The Era of Reform: 1978
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–
•
Dual Track Reform
Coexistence of a plan track and a market track
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•
More than two decades of stability and stellar growth
Steady decentralization
Combination of reform and transition
• “dual-track approach”
Eventually the planned economy with its targets/quotas and fixed
prices would be dismantled but unlike in the former SU, it did not
happened suddenly and did not lead to an econ collapse.
Two phases
–
1978-1984:
•
•
•
–
liberalization of agriculture in an effort to increase agri production, the
gov’t restructured the agri
creation of township and village enterprises (TVE) or rural firms, who
were allowed to compete with the state firms (collectively owned
enterprises, on hard budget constraints)
spontaneous privatization of service sector
1984: dual-track applied to industry
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Dual Track in Agriculture: Household Responsibility System (HRS)
•
In 1978, a village in central province (Anhui) initiated HRS. It soon gained popularity
and thus official endorsement in 1981.
– Xiaoping emphasized that state firms and government agencies should be led by those who
have some expertise, not by those who showed proper revolutionary fervor.
•
•
•
•
•
Covered 98% of rural population within 3 years.
Communes disbanded.
Household is a principal unit of agricultural production.
Land distributed to households as 15 year leases (after 1995, for 30 y)
Lease holders required to produce a planned allotment at planned (fixed) prices, but
free to produce and market any amount beyond planned allotment.
– The production decisions and profits were transferred from the commune to the household.
When the HRS was introduced, the collectivization was effectively brought to an end
•
•
•
91% of agricultural output planned in 1978, only 5% in 1993
Semi-ownership of land caused increase in labor productivity which released labor
into small-scale entrepreneurship, e.g. crafts, services
Released labor into township and village enterprises (TVE)
– Light industry
– free to make decisions, no plan targets, to sell at mkt prices, own employment practices
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China began its reforms with complete state ownership of industry,
transportation and commerce. Reforms began with changes in ownership
relationships in agri and small-scale trade, manufacturing and services. State
ownership is a main feature of mkt socialism
Dual-Track in Industrial Ownership Structure
• Old track state owned enterprises (SOE) vs new track non-SOEs
• Two types of new track ownership structures
– Township & Village Enterprises (TVEs) and purely private
• Mostly in small and medium industries—retail, textile, restaurants
– Most dynamic sector of the economy
• Owned or supervised by townships or villages (not state-owned)
• Can be collective enterprises, private firms, joint ventures.
• TVEs formally owned &controlled by villages &local communities
– in most TVEs, communities actually involved very little in operation of the
enterprises, TVEs act essentially as private firms
• Introduction of more competition
– Small family firms were encourage to compete
– State firms were encourage to comepete with each other, and new types of firms
were allowed to compete in formerly monopolistic sectors
–
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• SOEs are unprofitable and a major drain on the state budget (1985-10%
unprofitable, 1990-28%, 1995-50%)
• Most of the growth in China in non-state sector
• SOEs persist for two main reasons
– SOEs represent “commanding heights”
• State ownership of heavy industry
– SOEs employ 18% of the work force
• SOE reform
– in 1995 China initiated the “modern enterprise system,” which aimed to
transform the SOEs into modern corporations;
– Instead of privatization occurring, the form of state ownership itself was to
be transformed from direct state supervision and management to state
“shareholding” operated by “independent” managers backed a the state
asset-management commission & supervisory committee. State-owned
enterprises (SOE) were to be “corporatized”;
• “corporatized” firms are SOE where the state maintains majority ownership but
the management is independent.
– SOE were given improved managerial incentives, allowed to keep much of their own
profits for reinvestment and worker bonuses, and forced to rely on loans from state
banks rather than direct government grants.
• Eventually, the planned economy, with its quotas and its fixed prices,
would be dismantled, but unlike in the former Soviet Union it did not
happen suddenly and did not lead to an economic collapse.
– Gradually abolition of planned economy
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Dual-Track Regional Development
• Certain places (mostly coastal) targeted for faster transition
• Begins in 1980 when four southern coastal sites were designated Special
Economic Zones (SEZ)--Shantou, Shenzhen, Xiamen, Zhuhai, Hainan
Island added in 1988
• Twenty cities subsequently approved as Economic and Technological
Development Districts (ETDD)
• SEZs&ETDDs exempted from most controls on foreign investment and
private ownership that bring investments, foreign technology and mkt
access.
• Result is much faster growth, especially in non-state sector
• Regional disparities a major problem
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Economic Growth
Nation Guangdong Fujian
Average annual growth
SOEgrowth
TVEgrowth
Foreign and joint ventures
9.3%
19.7%
10.1
19.5
58.6
17.3%
9.5
19.6
50
Zhejiang
18.9%
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38.6
Jiangsu Shangdong
16.4%
9.1
17.8
42.3
16.3%
9.2
18.5
37.3
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Comparison with other East Asian Countries —China’s growth since
1978 has been high, but not as high as Japan’s or the Four Tigers
China, Japan, and the Four Tigers
800
China (Year 0=1978)
Japan (Year 0=1950)
South Korea (Year 0=1958)
Taiwan (Year 0=1950)
Hong Kong (Year 0=1958)
Singapore (Year 0=1965)
Index of Per Capita GDP (PPP)
700
600
Japan
500
Note: 1950 is five years after the end of WWII and is the first full year of the PRC
1958 is five years after the end of the Korean War and the UN embargo of PRC
1965 is the first year of Singapor's independence.
1978 is the year PRC begins transition
400
Singapore
Taiwan
Hong Kong
S. Korea
China
300
200
100
0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year
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d) International trade—open door policy
•
China opened to the world, tourism was allowed, students to study
abroad, the special econ zones were established to bring in foreign
technology, investment and mkt access.
•
International contacts between people (officials, tourists, students,
scholars, etc.)
•
Foreign trade and investment, especially in Special Economic Zones.
2. Sources of Growth
a) Initial conditions
–
in 1978, most labor (71%) agricultural
• marginal productivity was very low
• agricultural reforms caused large rise in productivity and
encouraged formation of TVEs and private enterprises (agrofood
process, light industry) from the freed-up labor
• movement of low-productivity labor into higher productivity
TVEs is the major source of growth
• opposite of Soviet Union, Central and Eastern Europe where
most labor was in SOEs which collapsed with transition
–
very little was planned in China at start of reform compared to Soviet
20
Union
b) Integration into global economy
–
exports gave ready employment for freed up agricultural labor in
labor intensive production in TVEs
–
allowed China to import modern technology
–
encouraged foreign direct investment which increased capital stock,
access to modern technology, and efficient western management
c) High saving rate
–
Chinese saving rate high even by Asian standards (China--23% of
disposable income, Japan: 21%, Taiwan: 18%, Germany: 13%, US:
8%)
d) Centralized control discredited
–
Great Leap Forward and Cultural Revolution were disasters obvious
to everyone
–
allowed Deng Xiaoping to institute reforms without much resistance
e) China is the largest recipient of foreign investment in Asia. Huge
investment from Hong Kong, Taiwan, and overseas Chinese (labor
intensive industries which were losing comparative advantage in Hong
Kong and Taiwan moved to mainland China)
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3) The Chinese Economic System
a) Corporate Governance and Property Rights
– private property rights lacking (business cannot turn to legal system to
enforce contracts)
– relational contracting
– the ultimate guarantor for property rights is the Chinese Communist
party
– 2007 (March) new property law adopted.
• The law covers the creation, transfer, and ownership of property, and is a
part of the ongoing effort to gradually develop a civil code. Hu Jintao
(President and Communist Party Leader, 2002) and Wen Jiabao (Prime
Minister, 2003) have taken a centrist position, protecting property rights for
the rising middle class and farmers, while promoting a "harmonious society"
that strives to distribute wealth more equitably, to increase social
expenditures on health and education, and to alleviate some of the excesses
of pollution and corruption that have accompanied rapid growth.
b) Capital Markets
– Companies receive funding thru banks, not thru stock markets
– Chinese companies operate with high debt burdens
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c) Privatization
–
SOEs continue to be a huge drain on economy
d) Agriculture
–
–
incomplete ownership of land
disincentive to improve land (reduces potential productivity of land)
e) Finance
–
–
–
near monopoly of state on banking
savings channeled to inefficient capital formation in SOEs
China’s commercial banks have a high ratio of non-performing
loans (NPLs)
f) Trade relations
–
–
joining WTO—12/01
trade relations with the US (MFN status), EU, Taiwan, and other
Asian countries
g) International finance
–
full convertibility
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h) Social safety net
– not as immediate need as in other transitional economies
•
•
•
–
–
–
–
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rural population to large extent self-sufficient
continued support of SOEs reduces urban unemployment
lack of political reform prevents the poor from having a voice
as SOEs privatized, unemployment will soar
rural population has much lower income and access to
health care
high rate of savings and self- reliance and family support
the dramatic rise in inequality (Gini Coefficient, China 0.40,
USA 0.40, India, 0.38)
Human Capital Investment
•
•
•
Difference between rural and urban
Difference between developed and under-developed area
They are both potential source of inequality
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Per Capita Income 1978 - 2001 (in RMB yuan)
7000
6860
6280
6000
5854
5425.1
5160.3
5000
4838.9
4283
4000
3496.2
3000
2577.4
2026.6
2000
1000
0
2366
2210.32253
2162
2090.1
1926.1
343.4
133.6
477.6
1700.6
1577.7
1510.2
1375.7
1221
1181.4
1002.2
921.6
899.6
784
739.1
686.3 708.6
544.9 601.5
397.6 423.8 462.6
191.3
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 200025
2001
rural
urban
Yucai Schools (Urban)
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Poor Village Schools
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i) Regional policy
– most growth from Special Economic Zones and
Development Areas
– huge income differential between coastal and interior
provinces
j) Population policy
– slowing population growth
– slowing/preventing migration to cities
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4) Transition in China—Summary
– Strategy
• From central planning to indicative planning
• From indicative planning to market allocation of goods and
services
• Grow out of the plan” instead of ``shock therapy”
• Transition and growth at the same time
– Transition
– Replacement of administrative allocation by market
allocation
– Replacement of administered prices by market prices
– To achieve this objective China used the dual track approach,
which established autonomy and incentive.
– Reforms began smoothly and econ growth accelerated
– Nobody was made obviously worse and opponents were
bought off (Pareto Improvement)
– Interdependence between SOE & non-state sector
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– The dual-track system of prices introduced in the mid-1980s
to facilitate the transition of China from a centrally planned to
a socialist market economy has essentially been phased out,
reducing to a single-track, market-based system, with the
following exceptions:
» In 2001/07, the remaining planned prices are to be
abolished with the exception of: the prices of natural gas,
oil, edible oils, grains, tobacco, water, salt, and products
related to national security
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Phasing Out the Dual-Track
(percent of output value, selected years)
Plan
price
Guide
price
Market
price
1978
1985
1988
1991
1993
1995
1998
1999
2001
94.4
37.0
24.0
22.2
10.4
17.0
9.1
6.7
2.7
0.0
23.0
19.0
20.0
2.1
4.4
7.1
2.9
3.4
5.6
40.0
57.0
57.8
87.5
78.6
83.8
90.4
93.9
Source: Price Yearbook of China (various years)
Note: "Guide prices" are government-administered prices, but with reference to
market supply and demand
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– China’s market transition is incomplete but in some
sense successful up until now
– Gradualism continues to guide experiments in
advancing reforms
– Agricultural reform:
• incomplete ownership of land
– disincentive to improve land
– reduces potential productivity of land
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