econ 330 lecture 11 notes from professor

7/30/2019 ECON 330 Lecture 11 Notes From Professor

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Economy of China

Chinas economic boom a chemical reaction of sorts(i) firstingredient was the Confucian heritage that emphasized savingsand education (ii) Maoist revolution that unified the country,

broke its entrenched interests , divided up the land and suppliedthe financial and human capital (iii) The quasi capitalist policies ofDeng Xiao Ping. None of these factors was enough by itself but in

combination they have been explosive.


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IntroductionFor centuries China stood as a leading civilization, outpacing the rest of the world in the arts andsciences, but in the 19th and early 20th centuries, the country was beset by civil unrest, major famines,

military defeats, and foreign occupation. After World War II, the Communists under MAO Zedongestablished an autocratic socialist system that, while ensuring China's sovereignty, imposed strictcontrols over everyday life and cost the lives of tens of millions of people. After 1978, MAO's successorDENG Xiaoping and other leaders focused on market-oriented economic development and by 2000output had quadrupled. For much of the population, living standards have improved dramatically andthe room for personal choice has expanded, yet political controls remain tight. China since the early1990s has increased its global outreach and participation in international organizations

Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role - in 2010 China became the world's largest exporter.

Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradualliberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of adiversified banking system, development of stock markets, rapid growth of the private sector, andopening to foreign trade and investment. China has implemented reforms in a gradualist fashion. Inrecent years, China has renewed its support for state-owned enterprises in sectors it considersimportant to "economic security," explicitly looking to foster globally competitive national champions.After keeping its currency tightly linked to the US dollar for years, in July 2005 China revalued itscurrency by 2.1% against the US dollar and moved to an exchange rate system that references a basketof currencies. From mid 2005 to late 2008 cumulative appreciation of the Renminbi against the USdollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from theonset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradualappreciation. The restructuring of the economy and resulting efficiency gains have contributed to amore than tenfold increase in GDP since 1978.


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IntroductionMeasured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010stood as the second-largest economy in the world after the US, having surpassed Japan in 2001. Thedollar values of China's agricultural and industrial output each exceed those of the US; China is secondto the US in the value of services it produces. Still, per capita income is below the world average.

The Chinese government faces numerous economic challenges, including: (a) reducing its highdomestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growthfor tens of millions of migrants and new entrants to the work force; (c) reducing corruption and othereconomic crimes; and (d) containing environmental damage and social strife related to the economy'srapid transformation. Economic development has progressed further in coastal provinces than in theinterior, and by 2011 more than 250 million migrant workers and their dependents had relocated to

urban areas to find work. One consequence of population control policy is that China is now one ofthe most rapidly aging countries in the world. Deterioration in the environment - notably air pollution,soil erosion, and the steady fall of the water table, especially in the North - is another long-termproblem. China continues to lose arable land because of erosion and economic development. TheChinese government is seeking to add energy production capacity from sources other than coal andoil, focusing on nuclear and alternative energy development. In 2010-11, China faced high inflationresulting largely from its credit-fueled stimulus program. Some tightening measures appear to havecontrolled inflation, but GDP growth consequently slowed to near 9% for 2011. An economicslowdown in Europe is expected to further drag Chinese growth in 2012. Debt overhang from thestimulus program, particularly among local governments, and a property price bubble challenge policymakers currently. The government's 12th Five-Year Plan, adopted in March 2011, emphasizescontinued economic reforms and the need to increase domestic consumption in order to make theeconomy less dependent on exports in the future. However, China has made only marginal progresstoward these rebalancing goals.


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China: Facts

Population (1.35 billion), percent of world population 20%, surface area = 3rd largest after Russia and Canada,

land surface for cultivation (only 10%), Average farm worker controls (1 acre of land,India 2, USA 100).

GDP: (PPP) $11.44 trillion (2011 est.): Because China's exchange rate is determine by fiat, rather than by

market forces, the official exchange rate measure of GDP is not an accurate measure of China's output; GDP at

the official exchange rate substantially understates the actual level of China's output vis-a-vis the rest of the

world; in China's situation, GDP at purchasing power parity provides the best measure for comparing output

across countries (2011 est.)

Real Growth rate: 9.2% (2011 est.)

GDP per capita: $8,500 (2011 est.)

Labor Force: 795.5 million

Unemployment rate: 6.5% (2011 est.)

Population below poverty line: 13.4%. In 2011, China set a new poverty line at RMB 2300 (approximately US

$363; this new standard is significantly higher than the line set in 2009, and as a result, 128 million Chinese are

now considered below the poverty line (2011)

Distribution of family income: Gini Index: 48 (2009)Inflation Rate: 5.5% (2011 est.)

Current Account Balance: $201.7 billion (2011 est.)


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Brief History(1). Between. 3000 BC and 2000 BC Chinese civilization began to take shape in the lower yellow riverbasin several hundred miles from the pacific coast. Chinas physical setting caused to develop stronginstitutions of authority., coordinated measures were needed to control flooding and irrigation. At thebeginning of recorded history during the Shang dynasty ( 1766-1122BC) this authority structurealready included a primitive network of feudal states.

(2). During Zhou dynasty 1122-256 BC) several decades before Socrates of Athens Confucius (KongTsu/Kong Zi , 551BC-479BC), traveled in China to convert warring rulers to his way of thinking . Theeducated son of an aristocratic family in present day Shandong, Confucius called for a return to thegood old days of peace honor and stability that prevailed during the early years of the Zhou dynasty.

His philosophy: (i) glorified the family as a model for all human relations (ii)elevated familial andsocial obligations over individual rights (iii) held government rulers responsible for the welfare of theirsubjects . (iv) appointments by the government based on merit measured by performance in writtenexamination.(v) Emphasis on education(vi) emphasis on savings. (vi)Confucianism became firmlyestablished as the philosophical basis for the Chinese civilization .

(3). Qin Dynasty (221BC-206BC). To protect his people from the northern Barbarians the first Qinemperor joined local fortifications into a Great Wall The Great Wall of China. (4) Han Dynasty (206

BC- 220 AD) were faithful Confucians. Established a University to train people in classics ofConfucianism


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History

(4). Medieval times: (i) China had remarkable strides in science and technology (ii) Chinese knewhow to cast iron 1500 years before Europeans (iii) Used iron for weapons and tools (iv) Gun powderwas invented in 6th C AD. 500 years before Gothenburg (v)Textile mills (vi) Algebra and trigonometry(vii) In 13th century China had the most sophisticated agriculture (viii) Advanced in medicine(ix)Medieval China was the most literate and most numerate in the world (x) seemed to be poised onthe threshold of an industrial revolution similar to the one that commenced in England 400 yearslater. (xi)Instead for unclear reasons Chinas cultural and technological development lost its utility.Some explanations are as follows:

(a) China victim of her own success: She was drawn into a higher level of equilibrium trap.

Improvements in agri. (food prod. increased) , medical technology improved (death rates declined),limited urbanization, cultural preferences for early marriages (large families) caused excessive pop.Growth, rising man land ratio, large population exacted a high strain on the raw material base,reduced the market value of labor and reduced demand for labor saving technologies.(b) unfortunatelyChinese discoveries continued to arise fromhappenstance, individual need, and the law of largenumbers. Unlike Europe China failed to develop a scientific method based on theoretical invention,innovation, and systematic experimentation. (c) The best and brightest of the Chinese society weredrawn into the civil service where the system of admission, evaluation and promotion provide littleopportunity or incentive for scientific research (d) Chinas economic development was disrupted bythe long era ofMongol domination when population was subjected to harsh taxation and servitude(1234-1368).(Mongol also did good things (i) grand canal was repaired and opened (ii) strengthenedNorth-South transportation systems (iii) Opened the economy to foreign trade and technologyMarco Polo visited china between 1275-1292)


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History(5). Qing (Manchu) Dynasty (1644-1912). (i) Qing emperors like communists who

would rule China in later years placed a high priority on political stability in ruralareas . (ii) They organized HH into self policing groupsthat required each memberof a village to inform on others. An environment of fear and suspicion preventedvillagers from entering into seditious plots, reducing the danger ofrural uprising.

(iii) Towards the end of the Qing dynasty a Horrible incidence of drug addiction.Opium used in China for centuries as medicine. When misuse became widespreadthe emperor forbade its production and sale in 1729. Imports banned in 1800. This

was troubling for the British who benefited from colonial opium trade between Indiaand china. 1839 China destroyed a large quantity of imported opium in Canton. TheBritish responded with overwhelming force, so called Opium Wars (1839-1842).China suffered ignominious defeat and was forced to open five additional TreatyPorts. Domestic production increased so that by 1923 it accounted for 2/3rd of winterplanting in Yunan province. Food production declined so that countrywide foodshortages, some cities 90% men and 60% women drug addicts. Chinese economystagnated 19th century due to population increase , technological backwardness, ,foreign colonialism, political corruption, social decay. Dynastic system collapsed1912.


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History(6) (i) 1912 A republic proclaimed by Sun Yat Sen, based on threefundamental principles of nationalism, socialism ,democracy. (ii) 1917

established government in Canton under control of his nationalist partyKuomintang, but most of the country under war lord control. (iii) 1923 SYSturned to the Soviets for help against the northern government. (iv)Moscow sent aid and advisers and persuaded SYS to cooperate with thecommunist party organized in Shanghai in 1921. (v) SYS died 1925 and wassucceeded by Chiang Kai Shek , joined hands with the communists in anorthern military expedition to unify the country. (vi) 1927 victory andnational unity in sight, Chiang led a bloody purge of his communist allies.(vii) The communists who survived established HQ in southern Jiangxiprovince with Mao Zedong as their leader. (vii) 1934 Kuomintang forcesattacked and forced communists to retreat northwards (Long March)eventually establishing HQ in Yenan in northern Shanxi province. (viii)1937Japan occupied large parts of Northern China, communists and nationalist

joined in resistance. (ix) After WWII civil war resumed communistsdefeated nationalists, who fled to Taiwan 1949. The communists under theleadership of Mao Zedong take over China.


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China Under Mao ZedongI. Importing the Soviet Model (1949-57)

(i) Mao said CPSU our best teacher we must learn from it. (ii) A 20 yeartreaty of friendship between China and SU. (iii)Ks of soviet advisors ,economists and technicians came to China, Ks of Chinese students trainedin SU. (iv) Farmland confiscated and distributed among poor peasants. (v)At least 2 million landlords died resisting takeover of land (vi)Elite hierarchyof traditional society destroyed. (vii) Collectivization program, by 1957,

800,000 cooperative farms created. (viii) In industry initially 2/3rd of theindustries nationalized (from outgoing nationalist and imperialists). (ix)Following Soviet NEP of 1921 the Chinese attempted to nationalize only thecommanding Heights (metallurgy, chemical and electrical engineering,machinery, railroads, etc) remaining left in private hands (x) strict lawsagainst production and use of drugs(xi) marriage laws to protect womensrights. (xii) Compulsory education. (xiii)First 5 Year Plan (1953-57) with thehelp of Soviet economists to speed industrialization reflecting traditionalsoviet emphasis on heavy industry, plan called for 20% growth rate inindustry, 5% in agriculture. (xiv) China doubled income per capita between1949-57.


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The Great Leap Forward (1958-61)

II. The Great Leap Forward. (1958-1960).(1)Mao realized that Soviet development model inappropriate for China . China poor overpopulated ,primitive communication system, must not rely on nationwide central planning and high priority toheavy industry.(ii) GLF supposed to replace soviet style unbalanced (super-industrialization) growthwith a Chinese policy ofbalanced growth (equal attention to industry and agriculture) (iii) Maowanted to develop a higher form of socialism based on revolutionary fervor and strict egalitarianism,moral incentives rather than soviet style bureaucratic organization and material rewards. (iv) Maobelieved that only by unleashing the full potential of the working class economic growth was possible.

(2) The Peoples Communes formed. In addition to the farms each commune typically operated owntax office, schools, hospitals, power stations, irrigation systems. Each commune included 3000 to5000 HH, and 100-200 production teams. (each production team=30-50 HH). Production team wasthe basic unit of agricultural organization. Its leaders decided which specific crop to grow and issuedwork assignments to HH.

(3) Small scale industry: (i)GLF emphasized development ofsmall scale labor intensive facilities inthe interior of the country, far from traditional industrial centers on the pacific coast. (ii) Strategydesigned to absorb unemployed and underemployed labor and provide industrial inputs to agriculture

and modernize isolated parts of the country. (iii)Small plants established by local governments toproduce agricultural tools, fertilizer, pesticides, iron, steel. (iv) By Fall 1958 so called backyardfurnaces operating all over the country.


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The Great Leap Forward

Positives: (i) GlF successfully spread industrial production and almost all provinces/regions becamesteel producers. (ii) Millions of workers mobilized each year to dig irrigation ditches/canals, and builddikes and dams for flood control, raise forests, and build roads and railways, schools, hospitals.

Negatives: (i) Disruption of economic management and local government services (ii) Rapid increasein industrial LF led to food shortages (iii) greater attention given to ideology than incentives. (iv) Large

part of income distributed according to the principle ofto each according to his need(v) HH deprivedof plots (vi)social ownership taken to the extremes and collectivized all personal property down tocooking pots. (vii) many smallfactories inefficient, unable to obtainraw material, operated only a fewhours a day and a few days in the week with unskilled labor (viii)Quality of output poor (v) By 1961clear that investment in large scale enterprises yield better returns and many small plants closed.

Legacy of GLF: (i) GLF contributed to an ideological dispute between Beijing and Moscow, ended theirdiplomatic relations in 1960, Soviet advisors/technical aid withdrawn, international communist

movement divided. (ii) private agricultural plots and rural markets liquidated (iii) disruption ofeconomic management, local government services and shifting of agricultural labor to industrialproduction contributed to a famine that was one of the worst catastrophes in human history. (iv) Theabove exacerbated the effects of poor weather. (v) Between 1958-61grain production down by 24%(vi) Estimated deaths due to famine and food shortages 15-30 million, (vii) The collapse of agriculturalproduction and experimentation with inefficient production techniques combined to reduce industrialproduction by 40% in 1961. (viii) The GLF also disrupted education and technology and control ofpopulation Growth.


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GLF Aftermath

Readjustment and recovery:

(i)AS GLF faltered Mao was openly criticized. (ii)In 1959party congress Mao able to retain chairmanship ofcentral committee, but forced to relinquish his position

as president given to Leo Shao Qi and general secretaryto Deng Xiao Ping. (iii) Agricultural communes reduced insize, (iv) work incentives strengthened and (v) privateplots restored (vi) inefficient small factories closed, (vii)Trade with the West increased (viii) Focus of economy

shifted from ideological to technological (ix) Birth controlencouraged (x) agricultural and industrial Incomeincreased. (xi) Beginning 1965, Mao criticized those inpower for taking the road to capitalism.


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The Cultural Revolution (1966-76)

The Cultural Revolution ( 1966-1976):Objectives: (i)CR primarily a political and ideological movement but hadimportant economic consequences. (ii) Its underlying purpose was to returnChina to the path of Utopian communism. (iii)Mao and his followers had atleast 3 objectives(a) to overturn existing power structure and reverse Sovietstyle trend toward bureaucratism and state capitalism (b) To cleanse NewChina of all traditional Chinese and Western cultural expressions that could

encourage the resurgence of feudalism and capitalism (c)) To raise thesocialist consciousness of masses.

Mao Appeals to Masses: Red Guards: (i) In his efforts to break thebureaucratic power structure Mao carried his appeal to the masses . (ii) Inplace of thecommunist youth league and other orderly politicalorganizations , Mao turned directly to the masses and formed Red Guards.

(iii) The red guards conducted a series of tribunals and purges to cleanse thecountry of capitalist roaders(iv) Counterrevolutionaries and rightists weresubject to condemnation. From shop keepers to journalists to teachers andgovernment leaders at local and national levels.


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The Cultural Revolution(v)Concessions of guilt were often obtained by torture. (vi)2.9 million persecuted ,

34000 died. (vii) Liu Shao Qi expelled from the party, stripped of his governmentauthority and put under house arrest where he died. (viii) 1967 central committee ofCP replaced by central cultural revolutionary group dominated by radicals (ix) Redguard groups roamed the countryside performing rectification campaign and feudingwith other groups. (x)Workers encouraged to oppose revisionist leaders offactories. (xiii) Industrial production declined .

The Three Way Alliance: (i) To restore resemblance of normalcy and order Mao

finally instructed the Peoples Liberation Army (PLA) to intervene. (ii) Once in controlthe army placed revolutionary committees in-charge of the factories and localgovernment. (iii) Each committee included representatives of army, red guard,repentant veteran managers. (iv) The old power structure thoroughly undermined.(v)The cultural component of the CR carried out with similar zeal. Campaigns wagedagainst Confucianism, western fashion, art, music and literature. (vi) All this closelyrelated with a broad campaign of revolution, in the effort to create a new

proletarian society with its own philosophy , technology, music, style of dress. (vii)Maos philosophy represented as a replacement of Confucianism and all expected tostudy it. (xxi) Intellectuals and bureaucrats were required to work in field to get intouch with masses.


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Military in Control: (i) Military elite gained unprecedented influence and political

power. (ii) 1969 defense minister Lin Biao designated to be Maos eventual successor(iii) Mao felt threatened by the strong role of the military and attempted to shiftpower to his civilian prime minister Zhou En Lai . (iv)1971 Lin Biao attempted toseize power in a coup detat but betrayed by one of his co-conspirators. (v) Lin triedto escape in a plane with his wife and son and six other people. (vi) The planemysteriously crashed in Northern china .

Prime Minister Zhou En lai: (i) Within a month of Lins demise Zhou En Lai held talks

with Henry Kissinger that led to normalization of relations with the US andpresident Nixons trip to China 1972. (ii) Zhou consolidated his power byrehabilitating moderates who were purged during the CR, chief among them wasDeng Xiao Ping who was GS of the central committee who was denounced as takingthe capitalist road (No. 2 of Leo Shao Qi). (iii) Zhou made Deng his Vice Premier in1973, vice chairman of CPC and chief of Staff of Army in 1975. (iv)Under Zhou andDeng many CR policies were reversed. (v) material incentives, foreign contacts andbureaucratic machinery of the government were strengthened, English coursesintroduced at the primary level . (vi) In a speech to national peoples congress in 1975Zhou laid groundwork for four modernization campaign setting goals fordevelopment of agriculture, industry, defense, and technology.


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Socialism With Chinese

Characteristics(i)1976 China shaken by death of Zhou En Lai (Jan), An earthquake killing 240,000 people , death ofMarshall Zhou Deh (July), major floods in Yellow River (Aug) death of Mao (September) (ii) Intensebattle for succession between Deng Xiao Ping and Jiang Qing the widow of Mao a leader of culturalrevolution and a member of the Gang of four. (1980 Jiang Qing and the gang of four arrested forcrimes causing 34,000 deaths) (iii) An interim leader Hua Guofeng appointed. (iv) December 1978party central committee meeting , the party praised Dengs earlier achievements and added some ofDengs supporters to the politburo and central committee , giving him effective control of thegovernment. (v) Hua Guofeng implicated as an accomplice in activities of the gang of four. Hua offered

his resignation and Deng Xiao Ping became the undisputed leader.(vi) Dengs followers supplementedMaos teachings on revolution with an ideology of pragmatism and modernization. (vii) shift in focus ofparty work from political agitation and class struggle to socialist modernization and improvedstandards of living (viii) Determined that the communist Party to continue to play a leading role insociety but clear lines drawn between the responsibilities of the party, government, and enterpriseleaders. (ix) In 1965 China faced a horrible famine, Deng called for market reforms and supported hisposition with a proverb yellow cat, black cat, as long as it catches mice it is good cat meaning thatends justify means, (x) 1979 Deng issued an ideological decree truth should still be sought fromfacts but only within the fence of Four Cardinal Principles (i) China would continue to follow socialist

road (ii) China would be governed by a dictatorship of the proletariat (iii) China would be led by thecommunist party (iv) China would be guided by Marxist, Leninist and Mao Zedong thoughts.


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Agriculture Reformed: Stages

1953, 1958, 1961 Reforms: (i)Traditional Chinese agriculture small scale subsistence oriented. Even among landlordsaverage holding in 1949 was 40 acres. (ii) Between 1953-57 government merged small peasant farms in soviet stylecollectives/kolkhozes (average membership 160 farmers) (iii)1958collective farms merged into communes with amembership of 3000-5000 families. Communes and production teams were too large to operate efficiently andincentive systems deficient. (iv)1961-65 income linked to performance of production team (30-50 HH) rather thanthe commune. (v) Families allowed to operate small private plots.

1978 Reforms Experiment:(i) Economic modernization to begin in agriculture sector by increased agricultural pricessupported by the government (ii) A group of production teams in Anhui province secretly began to experiment witha system of contracting land and output quotas to the individual HH. Result: Large increase in yield , so officials

supportive. (iii) Work incentives strengthened in communes based on Marxist prescription for early stages of socialism to each according to his work (iv) local authorities and industrial and agricultural enterprises given greaterautonomy.

1980 The House Responsibility System. (i) The HH responsibility system supported by the central government,reversed 3 decades of super collectivism and returning the worlds largest nation to a system of family farming .(ii)Huge communal fields were divided into small family plots (iii) Each participating HH contracted with the leaders ofhis production team to cultivate a tract of land for one year. (iv) In exchange the HH was obligated to provide fixedquotas of certain agricultural products to the team at fixed prices.(v) Anything in excess of agreed quantity of quotacould be consumed, sold in free market or sold to the state at negotiated prices .

1984 important modifications of responsibility system (i) the communes formally abolished (ii) ownership of land

and authority to negotiate contract with HH , transferred to the government of local villages and townships (iii) toencourage long term improvement s in irrigation and other land improvements and to encourage planting of fruit treesand other slow growing crops allowable terms of contract extended to 15 years. (iv) with permission from villagegovernment a HH could transfer its contracted land to another HH thus door opened for creation of a rural market inreal estate.


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Dual Track Economic Growth

Deng Xiao Ping Reforms (1978): (The reform strategy that has been implemented is best described as the dual

track approach, the coexistence of a market track and a plan track. The reform strategy that aimed at

coexistence of a market track and a plan track.

1.Dual Track Production: (i) rapid and comprehensive liberalization of agricultural sector while industrial sector

remained under traditional central planning management (ii) agricultural communes disbanded and land

distributed among peasants. (iii) peasants granted 15 year leases on land and land freely tradable. 1984 dual

track arrangement extended to industrial sector. (iv) state procurement quotas for consumer goods much lowerthan for producer goods (v) proportion of planned production of total industrial output value has been

reduced from 90% in 1978 to 5% in 1993.

2. Dual Track Pricing: (i) State procurement prices for agricultural products were raised and free markets for

products allowed (ii) lower plan price adjusted incrementally over time to approach the market price. (iii) two

exchange rates, official and black market were allowed in the beginning but unified in 1993. )

3. Dual Track Ownership :(i) 1979-83 collective commune system replaced by HH farming. (ii) an important

driving force behind change in ownership structure is foreign investment, especially overseas Chinese

investment (iii) Agri. A private sector activity.. New track non-state sector consisting of private and

semi-private enterprises community owned rural industrial enterprises and foreign joint ventures . Foreign

investment especially overseas Chinese investment increased. (iv) Large scale industry still SOEs.


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Dual Track Economic Growth

Town and Village Enterprises: TVEs classified (i) TVEs actually private but registered as collectively owned to escapelegal discrimination, called enterprises wearing the red cap (ii) hose which receive approval from local authorities in

return for a commitment to make an annual contribution to the village funds. (iii) local authorities exercise total

control over the TVEs.

Differences between SOEs and TVEs: (i) TVEs represent localized socialism compared to centralized socialism

embodied by SOEs (ii) TVEs shorter supervision distance so face less principal agent problem than SOEs (iii) TVEs non-

state enterprises their rescue not a state responsibility (iv) TVEs cannot borrow for ever, so unlike SOEs can be shut

down by competition (v) TVEs unlike SOEs can implement institutional innovations without central governmentpermission.

4. Dual Track Regional Development: (i) 1980 four southern coastal cities designated as special economic zones (SEZ)

and given autonomy to experiment with new institutions and reform., eg. exempted from many regulations

governing foreign investment. (ii)The resulting phenomenal growth spurred other regions to demand economic

liberalization as well. (iii) Eventually 20 cities approved as economic and technological development districts (ETDD)

which had some of the privileges of SEZs. (iv)The whole country saw high growth in coastal areas due to rapid

development of non-state sector. Interior of the country was mostly following traditional economic systems.


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Sources of Growth in China

(1)Chinas Economic Structure and Initial Conditions: Gradualism/Transition is more likely to succeed

in an underdeveloped and under industrialized economy with a huge surplus rural labor force likeChina than in an overindustrialized economy (Russia and Poland). Agriculture LF in China (1978=71%),life, income, benefits superior in urban industrial sector than rural agriculture sector. So peasantshappy to switch. This movement of low productivity agricultural labor into high productivity TVEs is theprimary cause of Chinas growth.

(2) The Extent of Chinas Central Planning: The extent of chinas central planning was much smallerthan Russia and Polands. 0.25 million commodities entered the Soviet economic plan while in Chinaonly 1200 commodities were included.

(3) Chinas economic reform unlike Russia and Poland reforms did not start in a situation with largemacroeconomic imbalances and a severe external debt crisis that required the implementation of anausterity program. While Russia/Poland were taming inflation and restructuring their fully employedeconomy simultaneously, China was developing its economy by having the TVEs employ theidle/surplus agricultural labor.

(4) Integration into Global Economy: This factor operates through three changes/channels. (i) Accessto international markets for labor intensive manufactured goods accelerated the movement of laborout of low productivity agriculture into high productivity industry. (ii) China could now buy moderntechnology (some of which was previously denied to China). (iii) Foreign direct investment increased

capital stock, transferred new technology, made available global distribution networks and introduceddomestic firms to more efficient management techniques.


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Sources of Growth

(5) Saving Behavior: Chinas saving rates arte unusually high (HH saving in China 23%of Yd, Japan 21%, Germany 13%, USA 8%). Flow of HH savings into the formal financialsystem ( the state bank and rural credit coops) has risen steadily from 3.4% of GDP in1980 to 11.7% in 1991. HH savings ( result in Increased savings, decreasedconsumption, AD down inflation down) Flow of savings through banks reduced theneed to print money to meet deficit financing.

(6) Two Disastrous Leftist Campaigns: The Great Leap Forward (1958-62) and theCultural Revolution (1966-76) weakened the administrative capacity of the state anddiscredited central planning. As a result of cultural revolution 60% of CommunistParty officials were purged . Thus there was no resistance when Deng Xiao Pingtransferred a significant amount of economic decision making power to provinces .The central ministrial and party apparatus were too politically exhausted to resistDengs decentralization.

(7) The Existence of Family Ties Between Mainland Chinese & the Overseas Chinese:The explosive growth of SEZs in southern China was caused by the wholesalemovement of labor intensive industries from HK and Taiwan which were losing theircompetitive advantage in those industries . Overseas Chinese from the ROW alsoinvested a great deal in China. China was closer, wages were lower and languagedifficulties were non-existent.

econ 330 lecture 11 notes from professor

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