China- A Look Edited

8/8/2019 China- A Look Edited

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CHINA


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Reasons1. All advanced countries were aging and aging fast.

Low to no domestic growth as exemplified by Japan, Germany

and France.

United States was the exception because it was aging less rapidly

Immigration from all around the world and especially from non-

white countries such as Mexico, Latin America, Asia and the

Caribbean.2 Political leaders of all advanced nations realized soon after the

first energy crisis of the 1970s, and more recently after the

collapse of Communism, that what matters most to people in

elections across national and cultural boundaries, is hard corerealities of economic growth as manifested in jobs and wealth

creation for the masses.

In other words, getting elected or re-elected was more due to

economic boom or bust rather than party loyalty, personal

charisma or future promises.


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This was clearly evidenced when George Bush Sr., who was the

most popular US President both domestically and internationally

(soon after and as a consequence of the First Gulf War in 1990), lost

the bid for reelection in 1992 because there was economicrecession; and Bill Clinton was elected on the now famous platform.

It happened in India with the defeat of the incumbent BJP Party

whose India Shining campaign failed to deliver jobs and

economic growth to non-urban masses.

3 Collapse ofCommunism as an ideological counterbalance to

market forces of capitalism And this was a worldwide phenomenon

not limited to the Soviet Union. Economic bankruptcy of

Communist nations forced them to adopt capitalism. And they have

embraced it with fervor and zeal comparable to what a convert

manifests in religious conversion.


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Indeed, the best capitalist nations of today are mostly ex-

C

ommunist nations includingC

hina, Vietnam, Eastern Europe,Russia and to some extent India which had adopted a socialistic

pattern of society in past and implemented License Raj.

Access to capital became easier through liberalization of trade,

contract manufacturing and re-emergence of their own stock

market exchanges.

The world became flat at not just in terms of information

technology (especially the mobile phones) and entrepreneurship,but also with respect to global agricultural or industrial resources.


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China- 1930 onwards

During the 1930s, China had developed a modern industrialsector, which stimulated modest but significant economic

growth.

The economy was heavily disrupted by war against Japan andthe Chinese Civil War from 1937 to 1949, after which the

victorious Communists installed a planned economy.

Afterwards, the economy largely stagnated and was disrupted by

the Great Leap Forward famine which killed between 30 and 40million people.


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Urban Chinese citizens experienced virtually no increase in living

standards from 1957 onwards, and rural Chinese were no better

in living standards in the 1970s than the 1930s.

Socialist equality had destroyed the incentive to improve.

The economic performance ofChina was extremely dismal when

compared with other East Asian countries, such as Japan, Korea

Riddled with huge inefficiencies and malinvestments, and with

Mao's death, leadership turned to market-oriented reforms as

the only way to salvage the failing economy.


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The Maoist Era When the CCP, (China Communist Party) came in power China had

been in decline for nearly a century.

Between 1949 and his death in 1976, Mao directed a radicaltransformation of the country.

Two Goals:

Achieving a peasant led socialist Revolution

Rapid Economic Development

The Maoist period divided into 4 eras:

Political Consolidation and Economic Reconstruction (1949-1957) The Great Leap Forward (1958-1960)

Economic Recovery (1961-1965)

Cultural Revolution (1966-1976)


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Political Consolidation and Economic Reconstruction

(1949-1957) Soviet Union for guidance-rebuilding the

economy.

First five year plan-( 1953-1957)-

Emphasis- Central Planning, Capital Accumulationand investment in Heavy Industry.

The strategy led to the growth of nearly 9% andby 1957 Mao has consolidated his power.


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Great leap Forward (1958-1960)

Land that had been redistributed to peasants was reclaimed and

granted to rural communes. Communes were directed to :-

Increase agricultural production,

Build rural infrastructure and

Establish an industrial base in country side

emphasis on steel production.

Ambitious targets were set and reports from the countryside was

optimistic.

More than a mn. backyard Iron smelters were constructed in the

first year and the state statistical bureau claimed that the

production of food and cotton doubled.


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Great leap Forward contd..

Fictitious gains- falsified figures by officials to the

masses.

Low Quality Steel.

Agricultural output felled significantly and 20mn.-30

mn. people mostly elderly & in poor health starved to

death.


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Economic Recovery( 1961-1965)Great Leap Disaster- policy shift .

Mao Zeodong withdrew day to day decision making and called

countrys well trained bureaucracy.

Maos longtime lieutenant, Deng Xiaoping- asked to stabilize theeconomy.

Deng quickly reversed much of the Great Leap.

Breaking Communes into smaller units

Bringing back technical experts Forcing peasants to return to farming.

The economy quickly recovered and, by 1965, output had returned

to Pre- great Leap Levels.


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Cultural Revolution

Mao Zeodong alleged that liberal bourgeoise(growing middle

class) elements were permeating(penetrating) the party andsociety at large and that they wanted to restore capitalism.

Mao insisted, in accordance with his theory of permanent

revolution, that these elements should be removed throughrevolutionary violent class struggle by mobilizing China's youth

who, responding to his appeal, then formed Red Guard groups

around the country.

In practice it meant widespread beatings, criticizing publically(

Deng Xiaoping son was permanently disabled when he was

thrown out of a window by Red Guards)


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Cultural Revolution contd..

Red Guards roamed the country attacking establishment elites

govt. officials mgrs, intellectuals.

The movement subsequently spread into the military, urban

workers, and the party leadership itself.

China turned inward during this period.

All ambassadors were recalled from abroad.

Although Mao himself officially declared the Cultural Revolution

to have ended in 1969, its active phase lasted until the

death.1976.


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Institutions of Social Control

The CCP exercised a tremendous degree of control over the Chinese

Population.Four Layers of administration

The central government

Provinces

Local authorities

Units (Danwei)

Although the economy was centrally planned- less rigidly hierarchical thanin Soviet Union.

Central govt. set broad goals- allowed the provinces and local authorities ahigh degree of autonomy regarding how to reach these goals.

All citizens were required to belong to a unit.


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Institutions of Social Control contd..

Danwei- multi purpose bodies.

Responsible for: Providing housing

Primary and secondary schooling

Pensions

Ration coupons for food clothing, furniture.

Administer birth control programs, approved marriages and

divorces & resolved personal disputes.

Workers were guaranteed lifetime employment , but were not free

to switch jobs or move to another city. Each unit, even within cities, was an isolated political and social

organization, with little communication between members of

different units.


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The Era of Economic Reform

Dengs strategy

Reform measures were legitimate:-

if they promoted rapid economic growth.

if they did not weaken the partys control of thepolitical system.


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The Era of Economic ReformDengs Slogan "Who cares if a cat is black or white as long as it

catches mice. In practice it means both marketization and

internationalization of the economy.

One of Dengs first steps was to tighten controls on population

growth.

Mao considered population as assetevery person added two

more hands to work.

Deng launched One Child Policy in 1978.

A variety of rewards and punishments were used to enforce the

policy, including subsidies, social sanctions & occasionallyabortions.

Ethnic minorities were exempted

granted permission for a second child if the first was girl.


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The Era of Economic Reform contd..

While Deng was clearly responsible for theeconomic reforms initiated since 1978, only afew policies were imposed from the center.

Further the high savings rate & exchange ratepolicy were also due to Central govt. policies.

Successful innovations were duplicated &

eventually endorsed by the Central govt.

Unsuccessful experiments were discarded.


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4 Categories of Reforms

Rural Reform

Trade and investment Reform SOE/Urban Reform

Institutional Reform

Reform in Country side/Rural Reforms

In 1978,most peasants still lived in rural communes & were instructed

to produce fixed quantities of agricultural products to met the plan.

In some areas local officials had begun to allow peasants to retain

production above their contracted amount & sell it to local markets.

Prompted by officials in drought ravaged provinces, Deng overtook

several measures to increase crop production & raise rural incomes.


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Agriculture


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Reform in Country side contd..

He instructed local officials to increase procurement prices for

central plan quotas & to allow above quotas output to be freelysold.

This created a dual price "system, in which a fixed amount ofoutput was delivered to met the plan & all incremental outputwas sold at market determined prices.

Related Innovation was- Household Responsibility System i.e. the family was responsible for managing production and

delivering a fixed quota of output to the commune.

The system shifted production decisions from communes tohouseholds and thus led to very different behavior.

In 1981, when the Central government officially approved thesystem,45% of rural households were already participating.

By 1983, the system has spread to 98% of farming households.


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Impact Immediate impact- production of all types jumped sharply.

The most rapid gains in agricultural output occurred between 1978-1984.

Grain yields grew at 5.7% rate, the production of oilseeds doubled and cottonoutput tripled.

Pork, beef & mutton production all grew by at least 80%.

After 1984, growth slowed to its long term avg. of about 2%.

The changes in the country side led to a virtuous cycle(+ve changes are taking

place).

Increased production and procurement prices raised rural incomes & led to asharp increase in savings.

Higher incomes created demand for consumer goods that were in short supply.


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Impact contd..

To meet this demand , local govt.s began to direct savings into

collectively owned firms, known as Township and Village

Enterprisesmany of which were actually established during the

Great leap forward to promote rural Industrialization.

Industrial promotion in country side boomed.


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Trade and Investment Reforms

Deng believed a similar strategy followed by Asian Tigers would

work for China.

Reform in country side has led to strong demand for imports,

primarily fertilizer and capital equipment & foreign exchange

reserved had fallen dangerously low.

Despite these factors, internationalization proved to be quite

controversial.

Hard Liners resisted because of worries about foreign influence.

Piecemeal Trade Reform started in 1979-80

Prior to 1979 , all trade had flowed through 12 Foreign Trade

Corporations(FTCs).

After that local officials started to license their own FTCs and allowed

local firms to bypass Central govt. FTCs


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Trade and Investment Reforms contd

By 1988, the number of registered FTCs had grown to 5,075.

In the early 1980s, the Central Govt. also began a slow reduction inimport tariffs, but many non tariff barriers remained.

The liberalization of FDI was much more controversial issue.

Foreign investment implied foreign control of Chinese assets and adilution of the Socialist character of the economy.

A compromise was reached where foreign investment would berestricted to just a few geographic areas, thereby isolatingforeigners influence while the costs and benefits of FDI wassuggested.


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Trade and Investment Reforms contd Four coastal cities- special economic zones in 1980.

- tax rate exemption & easy approval procedure for foreigninvestment.

Enterprises operating in SEZ were exempted from central plan,labor regulations and from many taxes.

Foreign Currency:

Until mid 1980s, foreign currency transaction tightly regulated.

All capital transactions required central bank approval.

Enterprises with foreign capital that were located in SEZ weregenerally allowed to retain foreign currency and to import andexport freely.


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SEZ

Xiamen SEZ-1980


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Mid 1980s domestic firms could retain a portion of foreignexchange they generated.

Reforms- dramatic transformation of chinas links to the outsideworld.

Since 1993 china has been the worlds largest developing countryrecipient of FDI.

By 1987, China had established 2 separate trading regimes.1) Export Processing regime(duty free imports-assemble in china-

export)

2) Import substitution regime(Chinese model)


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Export Processing regime

Labor intensive Assembly- in this system , components were

imported duty free, an enterprise in China assembled them,

and the goods were then re- exported.

Share of exports reached to 31% IN 1995 and more than 40%

in 1996.


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State Owned Enterprise Reform(SOE)

Country side and SEZ reforms led to increase in production and

income.

It increased pressure on SOEs - back bon of urban economy.

SOEs nurtured under central planning, accounted for 78% of

industrial output and 19% of total employment in 1978.

SOEs in key sector(heavy industry, mineral etc) reported to central

government.

Others reported to provincial or local government.


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Enterprise purchased inputs and sold their output at state

determined prices and give all their profits to the state.

Till 1978 SOEs primary source of government revenue.

Like most SOEs else where, SOEs in China over staff, inefficient

and poorly managed.

SOEs mainly were responsible for social services in urban areas.

Providing housing, Education, Health Care & Life Time Employment.

In many cases children inherited their parent jobs- Iron Rice Bowl


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Early 1980s-Experiment management Responsibility system,counterpart to Household responsibility System.

Freedom -firm by firm basis:

Increased autonomy over production and Investment.

The right to retain a portion of profits.

Right to sell above plan output at market prices.


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State Owned Enterprise Reform(SOE) contd.. Unlike the rural and trade reforms, initiatives designed to improve

the performance of SOEs- limited success.

SOEs share of industrial output continues to fall from 78% in 1978to 55% in 1990 but employment fell from 19% to 18%.

As non state firms gained competitiveness , SOEs monopolypositions were eroded and their combined contributions to thecentral govt. fell sharply from 38% of GDP in 1978 to only 3.6% in1990.

Management Responsibility System little to improve SOEsperformance-increased corruption.

Enterprise directors used their personal relationships(Guanxi) with

local and National leaders to negotiate prices for Industrial inputs.


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Institutional Reforms

Increased provincial autonomy

Fiscal Reform

Currency Reforms

Granted Provincial governments increased autonomy with regards

to taxation and Industrial development in 1984.

Local governments were granted significant tax collectionauthority- Tax Contract System.

Local govt. collected taxes and turned over a tax quota to the

Central govt. retaining high proportion of any above-quota tax

revenue.

Sharp decline in Central govt. revenue, which fell from 9.6% to

6.0% ofGDP between 1986-1992.


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Extensive Tax Reform 1994

1994- Central govt. implemented an extensive tax reform.

Established a National tax service that was responsible for direct

collection of national taxes, making Central Tax collection largely

independent of local officials.

1994 reforms also reduced the no. of taxes from 32 to 18 &

introduced a value added tax.

Finally it moved the system toward more uniform treatment for

domestic and foreign investment firms.


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Prior to reforms Income tax rated had varied by ownership

types & because ofbargaining between firm and various tax

collection authorities.

After the reforms there was single income tax applied to all

domestic firms & government announced that it planned to

unify the tax treatment for domestic and foreign invested

firms.

New system reversed fiscal contraction, & the Central govt.

share of consolidated revenue rose dramatically from 22% in

1993 to 50% in 1996.

Although main thrust of institutional reforms- to recentralize

fiscal and monetary controls, its a move away from Chinese

rigid political Centralization.


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As Commune system dismantled- the reformist leaders began to fear

that apolitical vacuumwas forming in the countryside.

To fill this void-competitive elections for the village level officials inthe late 1980s.

Areas where village elections were held- more compliance with tax

collection and population control.

Currency Convertibility

Prior to 1986- Yuan was largely inconvertible.

Domestic exporters were allowed to retain only a small percentage

of their export earnings.


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Importers had to petition the Bank ofChina for currency.

Dual exchange rate Central bank fixed the official exchange ratebut allowed limited free exchange on a parallel- Market Force.

1994- Dual exchange rate abolished & merged the market andofficial rates at the market rate.

Devaluation ofYuan at about 50%.

Boost to Chinese exports.

Reference: China: facing the 21st century- Prof.Robert E. Kennedy &Research Associate-Katherine Marquis- Harvard Business School


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New China OLD CHINANEW CHINA


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OLD CHINANEW CHINA


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Discussion Questions

Differences and Similarities between Chinaand South Korea's growth pattern.

Differences and similarities between India andChinas growth pattern.

After studying S. Korea and Chinas growth

pattern, do you think something could bedragged for India also. If yes what it could be.If No why not?

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