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Variants of Transition among Former

Socialist EconomiesChapter XV

China’s Socialist Market Economy: The Sleeping Giant Wakes

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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

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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

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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)

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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 self-

proclaimed socialist market economy

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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

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Historical and Cultural Background:Culture and Religion Three major religions have coexisted

Taoism and Confucianism are Chinese in origin Buddhism came originally from India

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Historical and Cultural Background:Culture and ReligionTaoism 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)

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Historical and Cultural Background:Culture and Religion Taoism was declared the state religion in the

5th century

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

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Historical and Cultural Background:Culture and ReligionConfucianism If Taoism, with its harmony and immortality is the

yin (female) of Chinese culture, then Confucianism is the yang (male), given its moralistic scholar-mandarin-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

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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 neo-Confucianism synthesis of the 12th century

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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

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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

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Historical and Cultural Background:Social Structure and Land Tenure in Traditional China The Confucian ruling class was the scholar-

gentry

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

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Historical and Cultural Background:The Dynasty Cycle Han (206 to 220 BC) Tang (618-906 BC) Song (960 to 1275) Yuan (1276 to 1367) Ming (1368 to 1644) Qing (1645-1911)

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Historical and Cultural Background:The Dynasty CycleRecurring 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

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Historical and Cultural Background:The Dynasty Cycle 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

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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

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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 1935-

1936 and they fought a peasant-based guerilla war

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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

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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

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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

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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

Nationalization of industry and trade

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Maoist Economic Policies:Implanting Socialism and the Stalinist Model, 1949-1957 Granted land to all peasants

Established localized aid teams in 1950 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

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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

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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

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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

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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

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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

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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

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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:

agriculture, industry, science and technology military

The strategy for achieving these aims of becoming a modern, industrial nation was the socialist market economy

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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

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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

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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"

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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

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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

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Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture Response to increased incentives

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

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Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture However, there are limits of Chinese

agriculture 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

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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

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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

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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

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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

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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

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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

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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

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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

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Dengism and Move to a Market Economy, 1979 to the Present: The PresentDespite recent economic success China faces severe

economic and political problems 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

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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

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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

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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

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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 high-technology exports

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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

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Hong Kong, Taiwan and Mainland China:The Three Chinas Compared Taiwan

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

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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