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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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Trade and Investment Reforms contd
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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Trade and Investment Reforms contd
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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State Owned Enterprise Reform(SOE)
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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State Owned Enterprise Reform(SOE)
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?