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 China’s 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

deltas

- 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:

- China’s 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:

- China’s population of 437 million had fallen to 25% ofworld’s population

- China’s 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

China’s 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 irrelevant

Traditional economy has rebounded, with

commercial/entrepreneurial networks proving

relevant again as economic reforms have

proceeded