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1
Variants of Transition among Former
Socialist EconomiesChapter XV
China’s Socialist Market Economy:
The Sleeping Giant Wakes
2
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
3
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
4
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)
5
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
6
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
7
Historical and Cultural Background:Culture and Religion Three major religions have coexisted
Taoism and Confucianism are Chinese in origin Buddhism came originally from India
8
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)
9
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
10
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
11
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
12
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
13
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
14
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
15
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 Cycle
Recurring 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
17
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
18
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
19
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
20
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
21
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
22
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
23
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
24
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
25
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
26
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
27
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
28
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
29
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
30
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
31
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
32
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
33
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
34
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"
35
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
36
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
37
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
38
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
39
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
40
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
41
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
42
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
43
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
44
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
45
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
46
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
47
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
48
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
49
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
50
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
51
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
52
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
53
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
54
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