China: The Continuing Revolution
History and Environment
Resources -- About 1.3 billion people, more
than one-fifth of the world's population, but only 10 percent of land
suitable for cultivation. Average farmer works less than one acre,
compared with 2 in India and 100 in U.S.
Early History -
Chinese civilization arose between 3000 and 2000 B.C. in Yellow River
basin, and environment required central institutions. Feudal states
under Shang dynasty, and empire was established during Qin (which built
Great Wall). Cultural unification under Han.
Imperial China was most technologically advanced and literate culture
in the world. Had bronze weapons and tools, gunpowder, movable type,
hemp-spinning machines, agricultural and medical techniques, algebra,
and trigonometry long (often hundreds of years) before the West.
"The Great Divergence"
When did Europe pull ahead of China and the rest of Asia in economic
development? The "traditional" view is that this happened
and started widening in the 16th century. A more recent "revisionist"
view, promoted by scholars such as Kenneth Pomeranz, suggests that
living standards were still similar in parts of China and the West
until the 19th century. However, in a 2012 article in the Journal of
Economic History, Li and Van Zanden estimate that Dutch GDP was roughly
double the level of the relatively prosperous Yangtze area in the
1820s. The debate continues.
Causes of Stagnation
Equilibrium Trap --Mark
Elvin argued that early
development of agricultural and medical technology, limited
urbanization, and preference for early marriages and large families
caused excessive population growth, strained raw material base, reduced
value of labor, and reduced demand for labor-saving technology. Doesn’t
explain why stagnation started before 16th
Nature of Discovery - China didn’t develop
scientific method (Lin Yifu)
- Harsh taxation and servitude during 1234-1368, but the economy was
temporarily opened to foreign trade and technology.
Opium and Colonialism
- Opium addiction reached crisis proportions by 1700s. Efforts to
prevent imports from India led to Opium Wars with Britain during
(Update) In Spring 2006 Journal
of Economic Perspectives, economic historian David Landes
explained the absence of a Chinese Industrial Revolution in terms of
excessive government and market inefficiency: "The Chinese state was
always stepping in to interfere with private enterprise..."
On the other hand, Perkins found that around 1800, there was one
government worker for every 32,000 people in China or for every 700
people in Europe. Insufficient expansion of infrastructure.
(Update) In Cliometrica (2015),
Dobado-Gonzales and others suggest, based on price
movements and other market data, that long-distance
agricultual markets failed to integrate in East Asia, as compared to
Europe, and this contributed to the Divergence, from "at least" the
18th century: "Despite the geographical proximity and ease of
transportation between China and
Japan, no statistical evidence of grain market integration between the
is found during the eighteenth and nineteenth centuries." So
the closed nature of Asian societies may have been a major contributor
to the Divergence.
Importing the Soviet Model, 1949-1957
Great Leap Forward, 1958-1960
Readjustment and Recovery, 1961-1965
V. The Cultural Revolution 1966-1976
of Power: 1976-1978
Socialism with Chinese Characteristics (1979-Present)
Ideology of Pragmatism
Deng Xiaoping proverb: "Yellow cat,
black cat, as long as it catches mice, it is a good cat."
Deng was known as a pragmatic leader.
Deng restated his philosophy in two compact slogans: "Practice is the
sole criterion of truth" and "Seek truth from facts."
Democracy Wall movement crushed. Deng issued new ideological
decree—truth sought from facts, but only within Four
Cardinal Principles: follow
the "socialist road," the "dictatorship of the proletariat," the
Communist Party, and Marxist-Leninist and Mao Zedong thought.
declared that Taiwan (later added Hong Kong) could remain autonomous
and capitalist when reunited with China—one
country, two systems.
Professor Li Yining developed a Marxian rationale for market
reforms—China is still operating at the primary
stage of socialism.
UPDATE: In 2007, Wen Jiabao declared
that China still is at the primary stage of socialism, and "will remain
so for a long time to come."
Premier Zhao Ziyang adopted primary stage thesis at 13th
Party Congress; China should develop socialism
with Chinese characteristics
Hu Yaobang died; students held memorial service in Tienanmen
Square. Demonstrators remained 6 weeks, until troops entered
the square on June 4. Recentralization of authority.
Deng Xiaoping visited special economic zones in
southern China, promoting reform.
Deng Xiaoping died; successors declared allegiance
to his pragmatic line.
President Jiang Zemin introduced the 'Three Represents'.
“The CPC will remain successful…so long as the Party represents the
requirements of developing China's advanced social productive forces,
the progressive course of China's advanced culture, and the fundamental
interests of the Chinese people.” Party membership open to
2002 - Hu Jintao became
President and Communist Party chief
- Wen Jiabao became
Prime Minister. Hu and Wen used a lot of socialist rhetoric,
promising to take care of the poorest people in society. At the
same time, they supported approval of a new Property Law,
which stabilized the condition of the wealthy.
2004 - The Chinese
constitution was amended to say that private property was “not to be
2005 - The government
published a draft of a new property law, inviting discussion.
2007 - New property
law finally adopted. Hu and Wen tried to take a centrist position,
protecting property rights for the rising middle class and farmers,
while promoting a "harmonious society" that strives to distribute
wealth more equitably, to increase social expenditures on health and
education, and to alleviate some of the excesses of pollution and
corruption that have accompanied rapid growth.
Read more about it here:
November 2012, Xi Jinping elected General Secretary of Communist Party
and Chairman of Military Commission; March 2013, also elected President
of the People's Republic. Consolidation of power and a renewed "cult of
November 2013, announced "deepening
reforms" that would allow "market forces" to play a "decisive" role in
allocating resources. The state would gradually reduce its involvement
in the distribution of capital, and restructure state-owned enterprises
to allow further competition.
Summer stock market crash that destroyed a third of value in one month,
and has led to capital flight. In 2015, Chinese nationals who expected
the yuan to fall moved about $550 billion out of the country into
foreign currencies. The government has responded by buying
trying to burning the short-sellers. "The nation’s stockpile of foreign
exchange reserves has dwindled to about $3.3 trillion. The cushion is
shrinking. 'Considering China’s foreign debt, trade, and exchange rate
management, it needs around $3 trillion in foreign exchange reserves to
be comfortable,' says Hao Hong, chief China strategist at Bocom
Traditional system—small-scale subsistence farming.
During 1953-1957, small farms merged into Soviet-style collectives.
In 1958, collectives merged into people's communes, with production
brigades and production teams evidently.
During 1961-1965, policy of "Agriculture First."
Communes reduced in size.
Incomes linked to performance of production teams and individuals
according to work-point system.
Families allowed to operate small private plots.
During 1966-1978, progress prevented by Cultural Revolution and the
post-Mao succession crisis.
Late 1978, return to reforms of early 1960s, and experimentation with
system of contracting land and output quotas to individual households.
Responsibility System actively
promoted by government, beginning in 1981. Covered 98% of rural
population within 3 years.
Communal fields were divided into small family plots.
Households contracted with production team to cultivate a tract of land
in exchange for fixed quotas of certain agricultural products to the
team at fixed prices.
System modified in 1984-1985: communes abolished; land ownership
transferred local villages and townships; allowable terms of the
contracts extended to 15 years (30 years after 1995); household could
transfer its contracted land to another household.
System was big initial success, based on stronger incentives and more
even distribution of labor effort over the land.
By 1985, grain production returned to lower trend growth and then
declined from 1998-2003. Largely caused by diversion of land
from agriculture and from grain acreage to fruit and
high-value crops (same happened in Japan and other heavily populated
countries during industrialization). Since 2003, recovery of grain
production explained largely by heavy investments in agriculture -- 6
trillion yuan ($930 billion) during 2003-2012, the highest level in
Production (1000 MT), 1960-2012
In 1978, Sichuan profit retention experiment leading to industrial
enterprises negotiate "profit and loss contract" agreements with
supervisory officials. Some 6,600 enterprises covered by 1990; all
covered by the end of 1992.
New draft of constitution in 1978 legalized small-scale private
enterprise. During 1978-1983, number of private businesses grew from
100,000 to 5.8 million.
In 1984, ownership of rural commune industrial holdings transferred to
the new units of local government, creating township
and village enterprises (TVEs). These
grew rapidly in output and efficiency:
Kinship links and implicit property rights.
Public finance decentralized since 1984.
Communities with TVEs compete for investors.
TVEs supply goods and services neglected by old system.
Supply and technology alliances with state industries and foreign
Proportion of unprofitable state-owned enterprises (SOEs) increased
from 10 percent in 1985 to 28 percent in 1990, to nearly 50 percent in
1995. Subsidies contributed to acceleration of inflation. 9th
Five-Year Plan (1996-2000) promised financial support to only 1,000 of
the 13,000 large and medium-sized enterprises. UPDATE:
Since 1994, SOEs have been allowed to convert to worker-owned producer
cooperatives (76% have done so in Sichuan). Workers do not
have portable ownership rights.
UPDATE: 1999 reform allowed indebted SOEs, in
cooperation with their lenders (state-owned banks), to convert part of
their debt to equity, held by the lending bank or by an asset
management company. The latter has authority, as an
owner, to restructure the enterprise.
Population Growth and Employment
Open Door Policy
International contacts between people—officials, tourists, students,
Foreign trade and investment rights, especially in Special Economic
China is largest recipient of foreign investment in Asia, and second
largest in the world.
How Far Can One Leg Go?
Chinese advantages in the coming century:
Long and stable cultural heritage.
Strong momentum of self-sustained growth.
Untapped natural resources.
Breaking the cycle of rising and falling inflation.
Coping with unemployment arising from industrial restructuring and
displacement of surplus rural labor.
Completing transition to a competitive market economy, relying on
Strengthening the "one leg" of economic reform with political reforms
Competing views of the global future:
"No One's World" -- Chinese movement toward democracy will continue to
be slow, because the Party has successfully co-opted the new elite
groups and has delivered success to much of the population.
"Breakout Nations" -- Current rates of investment are unsustainable (fiscal balances and saving rates), rising fear of inflation, and "The Fountain of Youth Runs Dry."
"Outrageous Fortunes" -- The groupism and authoritarianism of Chinese
Confucianism will set a limit on economic growth that will set a
relatively low convergence target for living standards. Within 40
years, its growth rate may fall below that of the U.S., crippled by an
aging population (working-age share of population is currently higher
in China than in U.S., but will be lower by 2050).
UPDATE: China’s Accession to the WTO
China began negotiations to rejoin the GATT, the WTO’s precursor.
China reached bilateral agreement on the terms of WTO entry with U.S.
U.S. Congress granted permanent normal trading relations (PNTR) to
Chinese official accession to the WTO.
Commitments Under U.S.-China Agreement
TARIFFS—China will cut tariffs from an average of 24.6% to 9.4 percent
overall, eliminating all tariffs on computers, telecommunications
equipment, and other high-tech products.
AGRICULTURE—China will eliminate export subsidies, cut average tariffs
on U.S. agricultural products from 31% to 17.5% in 2004, and eliminate
health barriers not based on scientific evidence.
QUOTAS AND LICENSES--China will eliminate these restrictions with
phase-ins limited to five years.
TRADE/DISTRIBUTION—Over three years, foreign companies will gain rights
to handle their own foreign trade transactions in China and to own and
operate distribution networks.
SERVICES--China will phase out most restrictions banking, insurance,
telecommunications, professional services such as accountancy and legal
consulting, business and computer related services, motion pictures,
STATE-OWNED ENTERPRISES--China will ensure that state-owned enterprises
will make purchases and sales based on commercial considerations, such
as price, quality, availability and marketability, allowing U.S. firms
to compete for sales.
Impact of China's entry
China's GDP and quadrupled and raw material exporters have clearly benefitted. cording
to Brad Setser's recent analysis, the "shock" in the U.S. after China's entry was much larger than initially expected, but some of this was caused not by China, but by the strength of the dollar and by technology. Accession opened other markets to China's goods and attracted investment into China, but state controls still made it a difficult market to sell manufactured goods. The U.S. could have made more use of section 201 of the WTO rules, limiting import surges. Setser: "In no small part, this is because U.S. and European firms benefited from making use of Chinese production to meet global demand. The interests of U.S. firms and U.S. labor were not always aligned."
Record of implementation:
According to its 2016 Report
to Congress, China agressively worked toward compliance with its obligations during 2002, but a new government came to power in 2003, and "while the Chinese government continued to take steps to implement China’s outstanding WTO commitments, it generally did not pursue economic reforms as aggressively as before. Instead, the Chinese government increasingly emphasized the state’s role in the economy... By 2013, when China’s next leadership transition was complete, some positive signs of a renewed commitment to economic reform in China began to emerge... [However], to date, the promise of the developments in 2013 has not been realized. The pronouncements of the Third Plenum have faced strong resistance from entrenched interests..." The Report goes on to criticize China's performance in protection of intellectual property rights and trade secrets, and limits on market access for services and agricultural goods.