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  • Economists vs. historians

    The traditional economy

    Beginnings of industrialization, 1912-37

    War and civil war, 1937-49

    Legacies of pre-1949 economy

  • 1949 seems to be a divide in Chinas history

    Not only is form of government radically different -China has grown rapidly since 1949 despitesome disastrous policies under Mao

    Prior to 1949, China never exhibited moderneconomic growth

    Historians view 1949 as turning point, whileeconomists believe China was actually successfulin early part of 20th century, i.e., it would likely havegrown without the socialist revolution

    * See Myers (1991)

  • Economists stress role of economic continuity,i.e., favorable conditions either side of 1949; also,witness growth of Hong Kong and Taiwan after1950s

    Historians stress different social conditionseither side of 1949 prior to revolution:

    - unfair distribution of land/other assets

    - corrupt political power preventing growth

    - increased population pressure on limitedresources

    Acceleration of growth due to new set ofconditions after 1949, i.e., revolution providedway to solve problems

  • Traditional Agriculture:

    - China very rural 90% living in countryside

    - farm technology consisted of selected seeds (rice),

    organic fertilizer (human and animal), and irrigation

    - required large and intensive application of labor first

    in Lower Yangtze, spread to other areas where irrigation

    was feasible

    - supported growing population 72 million (1400) to 381

    million (1820) 36% of world population

    - China accounted for ~ 30% of global GDP in 1820

  • Commercialized Countryside:

    - densely populated countryside supported network of

    markets, especially Lower Yangtze and Pearl River


    - regions tied together by water transport along major

    rivers, plus Grand Canal between Lower Yangtze and

    North China Plain

    - supported commercialized pre-modern economy with

    some sophisticated institutions, and competitive

    markets based on small-scale households bottom-

    heavy (Rawski, 1987)

  • (i) Institutions paper money, written contracts, banks, legal resolution of disputes

    (ii) Markets competitive in goods and inputs

    (iii) Real social mobility despite inequality no castes or aristocracy defined by birth

    (iv) Small-Scale household-based economy, with agricultural and non-agricultural production on small-scale, but linked to different markets

    - household/small-firm specialization common, e.g., silk production split into separate tasks vertically

    - chains of small processors and middlemen linked household producers, merchants and consumers

  • Crisis of Traditional Economy:

    - by end of 18th Century, most cultivatable land farmed, few opportunities for investment - despite income of elite

    - Qing dynasty in decline public food reserves declined after 1790s; poor maintenance of key irrigation systems famines due to floods/droughts

    - social stresses fell disproportionately on poor - land distribution not unequal, but income inequality significant

    The Chinese peasant is like a man standing on tiptoe up to his nose in water the slightest ripple is enough to drown him (Tawney, 1964)

    - China entered century-long decline just as Europe grew

  • Failed Response to West and Japan:

    - foreign encroachment on China occurred at a time ofdynastic weakness and economic crisis

    - China had long run a trade surplus with world (silk, teaand porcelain), paid for with silver

    - by early-1800s, Britain becoming dominant power,sought a commodity to redress trade imbalance

    - opium, grown in India, exported through Hong Kong China faced economic (falling supply of monetarymetals) and social (addiction) problems

  • Failed Response to West and Japan:

    - attempts to stop opium led to war with Britain in 1839,defeat resulting in Treaty of Nanking, 1842 Hong Kongceded to Britain, 5 Treaty Ports opened under foreigncontrol

    - China lost four more foreign wars, notably Sino-Japanesewar of 1895, resulting in seizure of Taiwan

    - 1895 Treaty of Shimonoseki resulted in opening up of Chinato foreign investment, concentrated in Treaty Ports, e.g.,Shanghai, governed by foreign powers

    - Qing government eventually collapsed in 1911 followingforeign occupation of Beijing and 1901 Boxer Protocol control over tax revenues ceded to foreign powers

  • Failed Response to West and Japan:

    - Chinas opening to outside world coincided with long

    period of national humiliation

    - Beginnings of modern industry in China date to 1895

    - Foreign investment concentrated in Treaty Ports, not

    subject to Chinese jurisdiction 80 at their peak,

    Shanghai most important

    - Extra-territoriality (exemption from domestic law) and

    control of Treaty Ports politically very controversial

    even influences attitudes in modern China

  • Economic Decline by 1913:

    - Chinas population of 437 million had fallen to 25% ofworlds population

    - Chinas GDP had fallen to 9% of global GDP, andGDP/capita had fallen to 40% of world average from90% in 1820

    - from being a center of civilized world, China had fallento position of underdevelopment and backwardness

    - impact of West highly traumatic in terms of decline,predatory nature of colonialism, and failure of Chinesegovernment to deal with challenge

  • After 1911 - period of warlord domination,fragmentation and civil war, until unification by theNationalist Party in 1927

    1927-37, the Nanjing decade, China had relativepeace

    Industrial development began, along with moderntransportation and communication links

    Nationalist government invested in education andagricultural extension

    Modern factory production grew 8-9%, 1912-36,producing 2% of GDP by 1933

  • Two patterns to industrial growth:

    (i) Treaty Port industrialization: modern industrial enclaves

    developed in ports, e.g., 42% of output in textiles, with 70%

    produced in Shanghai, Tianjin and Qingdao

    Industrialization started by foreigners, but Chinese

    capitalists became key actors by 1930s, 78% of value of

    factory output from Chinese-owned firms

    (ii) Manchurian industrialization: investment in heavy

    industry, mining, and railroads by Japanese government -

    objective to produce raw materials for their domestic

    industries, but little local skill-transfer

  • China proper Manchuria

    Market Domestic China Japanese industry

    Ownership Chinese, foreign Foreign

    Structure Light, consumer

    goods, e.g., textiles

    Heavy, mining,

    producer goods, e.g.,

    steel (Anshan)

    Skill formation Steady accumulation Little skill transfer

    Linkages Backward Few or none

  • Modern sector did grow in 1920-30s, but unclearwhat impact was on traditional sectors

    - Rawski (1989) argues positive impact of growingdemand from industry, cities and trade onagriculture, handicrafts, and transport

    - beyond areas around coastal cities, most farmerscontinued to operate at subsistence level

    Industrialization started, but had not yet begun tofundamentally change structure of Chineseeconomy

  • Japanese influence in Manchuria increased andextended 1905 to 1931, followed by Japaneseinvasion of China proper in 1937

    China then involved in almost unbroken period ofwarfare until the Communist victory in 1949

    Japanese invasion weakened Nationalistgovernment, and Communist guerillas gainedlegitimacy fighting Japanese

    End of Pacific war in 1945 laid stage for civil warbetween Nationalists and Communists

  • War obscured important changes over this period:

    (i) Rise and fall of Japan-centered East Asian economy: Japan

    at center (manufacturing and services); inner circle of

    Taiwan and Korea (food producers); middle circle of

    Manchuria (intermediate input supplier); outer circle of

    China proper (sites for investment) collapsed in 1945

    (ii) Rise of Manchuria: building of industrial economy by

    Japanese had long-term impact on China by 1949,

    accounted for majority of its industrial capacity

    (iii) State intervention: 66% of industry state-run by 1947

    (iv) Inflation: Nationalists printed money to finance war

    severe macroeconomic imbalances

  • Immediate legacy for Socialist era (1949-78):

    - disruption/damage to economic infrastructure

    - financial chaos with hyperinflation

    - China still very poor

    Experiences aided transition to socialism:

    - strong aversion to foreign influence adoptionof inward-looking socialist development

    - Nationalists considered incompetent

    - willingness to accept repression

    - inherited heavy industry developed in Manchuria

  • Benefits for post-1978 economy:

    - experience of household-based economy critical tomeeting market needs

    - rapid growth of township and village enterprises(TVEs) in densely populated commercializedcountryside met needs neglected under socialism

    - Lower Yangtze region regained prominence, andNortheast receded in importance

    - SEZs echoed Treaty Ports, but under Chinesejurisdiction, part of dual track approach, and helpedre-establish links between Hong Kong, Taiwan and PRC

  • Chinas current economy, and its development,

    show a rediscovery of the traditional system

    Did the traditional economy fail? Only in the sense

    that it was repressed as a result of war and civil

    war, and socialism making it seem irr