china and the 21st century, session three -- esade business school
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China in the 20th Century (1911-2008)The Emergence of China in the 21st Century — Session three Luis Torras (@TorrasLuis) November 2015
China in the XX century: Chinese economic history can be divided in three main periods
WTO$entry$
Asian$Crisis$Shenzen$SEZ$
Deng$Xiaoping$
$$$Cultural$Revolu=on$
$$$End$of$Qing$dynasty$
$$$Communist$Party$of$China$founda=on$
$$$People’s$republic$of$China;$Mao$first$Chairman$
$$$Great$Leap$Forward$
1900$ 1910$ 1920$ 1930$ 1940$ 1950$ 1960$ 1970$ 1980$ 1990$ 2000$
ECONOMIC REFORM
MAOIST ERA
Farm$priva=za=on$
GDP
Source: Maddison; IMF.
! Between&1949&and&1978&China&suffered&the&consequences&of&a&socialist&planned®ime&that&caused&famine&and&starva>on&
! In&1978,&Deng&Xiaoping&became&China’s&new&leader&and&the&economic&reform&began&
! 1978&it&is&the&essen>al&milestone&to&understand&Chinese&recent&history&
2
Chinese GDP though 20th century
REPUBLIC OF CHINA
1912-1949: Republic of China, Dr. Sun Yat-sen
Sun Yat-sen (1866-1925), chairman of the Republic of China and premier of the Kuomintang.
3
1912-1949: Republic of China, Chiang Kai-shek
Portrait of Chiang Kai-shek hangs on the Tiananmen. 4
1937-1945: Second sino-Japanese war
December, 1937, bodies of victims along Qinhuai River out of Nanjing's west gate during Nanjing Massacre.
5
1937-1945: Japanese occupation, situation at the end of World War II
Japanese occupation (red) and Communist bases (striped). 6
1946-50: Chinese civil war: Chiang Kai-shek (nationalists) vs. Mao Zedong (communist)
Chiang Kai-shek on the cover of a 1933 edition of Time magazine
Mao Zedong in 1938, writing On Protracted War.
7
1946-50: Chinese civil war: Chiang Kai-shek (nationalists) vs. Mao Zedong (communist)
1934-1935: movement of Communist forces during the long march. 8
October 1, 1949: Mao Zedong proclaims the People’s Republic of China (China last unification)
Mao Zedong proclaiming the establishment of the People's Republic in 1949.
9
Between 1949 and 1978, Mao and the CCP set up a socialist planned-economy regime based on Marxist theory
Source: Mises; Huerta de Soto; Margolin.
Socialism aims a social system based on public ownership of the
means of production
Socialism in China was implemented thought three main things: Agricultural
collectivization, central planned economy and repression
French scholar J.L. Margolin estimates the number of deaths due to the
Communist policies in 65 million people
! government is the only employer
! government decides what has to be produced (planned economy)
! anyone can consume more that what the government allows him to do
! there is no room left for freedom
! Agricultural collectivization
WHAT IS COMUNISM? HOW WAS IMPLEMENTED IN CHINA? WHAT WERE THE RESULTS?
Therefore in a socialist commonwealth…
“the theory of communism (socialism) may be summed up in the single sentence: Abolition of private property”
Communist Manifesto (1848)
• Mao started an agricultural revolution in order to collectivized the land and set up a commune system
• Peasants were force to join the communes and small business and private property was abolished
! Great Leap Forward (1958-62) • Once all resources were centralized in the power of
the State, the communists design a plan in order to transform China into an industrialized country
! Cultural revolution (1966-78) • In order to re-establish faith in the revolution, Mao
intensified the purges and violence against those who question their policies
! Violence (many people were forced to move to the countryside, people were forced to join the communes, private business forbidden,…)
! Between 30-65 million people died, 35 million during the period of the Great Leap Forward alone (worse famine in absolute terms in human history)
! Starvation ! Internal purges
! Social repression
! Environment collapse
! Dictatorial state under the CCP
! China did not develop growth and industry
10
Mao’s Cultural revolution 1966-76
Completely smash the capitalist class and the reactionary line of Liu and Deng!11
Mao’s Cultural revolution 1966-76
Mao’s Little Red Book (1966).
12
China's Communist Party (CCP) focused on Soviet-like socialist policies to rebuild the economy after wars and invasions
During'Mao'Zedong's'rule,'the'CCP'focused'on:'
! Rural'collec:viza:on'! Central'planning'! State'control'and'ownership'of'industry'! Chinese'selfAsufficiency'
1949
1950s
1958
The Chinese Communist Party (CCP) establishes the People's Republic of China (PRC)
1953
First Five Year Plan announced • Industry nationalized • Profits diverted to "key" industries
(iron, steel, textiles)
Second Five Year Plan announced Mao's "Great Leap Forward"
Nationalization of industries: focus on industrialization Land reform: collective model in the agrarian sector
(Soviet model )
Cultural Revolution 1966
13
– Deng Xiaoping
“To get rich is glorious.”
14
1978: Deng Xiaoping, the road to (state/Chinese) capitalism to promote growth
Deng Xiaoping (1904-1997).15
In 1978 “the wall falls,” and China begins his particular process of global integration
Deng Xiaoping on an official visit to the United States with President Carter in January 1979.16
Since 1978, China has experienced the “great convergence”, the great story of our generation
Source: IMF.
0%
5%
10%
15%
20%
25%
1980 1985 1990 1995 2000 2005 2010 2014e 2018e
China's per capita GDP compared to the GDP per capita of US!
In#1980#the#average#American#was#20#6mes#richer#than#the#average#
Chinese#richest#,#today#this#ra6o#has#been#reduced#to#
only#5#6mes
17
China is been growing two decades above 7%
Source: Oficial stats.18
6%
8%
10%
12%
14%
2002 2004 2006 2008 2010 2012 2014 2015
XVI$$NPC$ XVII$NPC$ XVIII$NPC$
Chinese Real GDP growth
China: the great story of our generation.
The “great divergence” The “great convergence”
GDP$per$capita$evolu0on$ra0o$selected$countries,$150082008$ World$GDP$percentage$on$total$principal$economies$(198082018)$
Source: Maddison; IMF. PPP data. Adapted form Prof. Niall Ferguson.
Share of Chinese GDP on total
19
Catch-up in GDP per capita with the US
Ratio of GDP per capita in China to GDP in US (%)
The reform is a story of a great success that has allow China to catch-up with the rest of the world after years of stagnation
Source: IMF.
0%
5%
10%
15%
20%
25%
1980 1985 1990 1995 2000 2005 2010 2014e 2018e
China's per capita GDP compared to the GDP per capita of US!
In#1980#the#average#American#was#20#6mes#richer#than#the#average#
Chinese#richest#,#today#this#ra6o#has#been#reduced#to#
only#5#6mes
20
Chinese/US per capita GDP ratio
Deng had a clear vision for China: Open Door Policy and reversed policies that had closed China's market
21
! Economic growth main priority, could best be achieved through liberalization policies (Special Economic Zones)
! Descollectivization (household responsibility system) and swift towards private initiative
! Responsibility in agriculture and industry was decentralized, small-scale enterprises and services were permitted
Posi%ve:)! China's)GDP)quadrupled)from)1978)to)2002)! Manufacturing)exploded;)in)Shenzhen)(the)
first)SEZ),)the)number)of)manufacturing)enterprises)increased)from)26)in)1980)to)500)in)1984,)and)personal)income)was)five)%mes)the)na%onal)average)
! Trade)and)investment)flourished,)China's)economy)grew)faster)than)any)other)in)the)world)in)the)1980's))
! Liberaliza%on)policies)set)the)stage)for)China's)accession)to)the)WTO)
)
Open)door)policy) First)results)
Nega%ve:)! Serious)
environmental)problems)caused)by)industrial)pollu%on)and)rapid)economic)development)
! Inequali%es)and)migra%on)pressures)
The reform (in short) refers to the process of transformation of the Chinese economy: from planned economy to market economy
22
COMMUNIST DICTATORSHIP
As#of###20151)#1978
Abolition of private property
and private business
Central planned closed economy (“Soviet type”)
Political and social
dictatorship
FREE OPEN SOCIETY
Private property
Free entrepreneurship
Free-market economy
Democracy
(rule of law)
Commune system descollectivization
Household Responsibility
System
Increase procurement prices
Agricultural decentralization
SOEs allowed to retain their profits
Creation of a Profit Tax
Bank system
“Growing out of the plan”
Openness (SEZ)
Join WTO in 2001
Private property in China
Reduction of SOEs
Market liberalizations
30%
55%
70%
0%
Reduction of tariffs PL
ANNED
#ECO
NOMY# M
ARKET#ECONOMY#
Increase efficiency
Market mechanisms
1984 1988 1990 2000 2007
Fiscal decentralization
Source: Author. Illustrative. (1) Based on the 2015 Index of Economic Freedom.
The process of openness and reform
Agricultural descollectivization provide the right incentives to generate the surplus needed for Chinese industrialisation
23
Maoist'era'lack'of'incen/ves'
! In'1979,'procurement'prices'rised'by'22%,'and'40%'accumula/ve'during'the'next'decade'
! Descollec/viza/on'of'the'commune'system'was'done'with'the'Household'Responsability'System'that'allowed'subcontrac/ng'small'plots'to'individual'households'
! In'1983,'almost'98%'of'the'agrarian'sector'had'switched'to'the'HRS'
! Results'(1978L1988):'! Fixed'quota'(State'plan)'from'47.8'million'tons'to'50.5'million'
! Domes/c'produc/on'jumped'from'304.8'million'tons'to'394.1'million'
Key'facts'
The Dual-track strategy was used in several issues of the reform as part of “the growing out of the plan” system…
24
The idea was that market economy began to drive Chinese economy gradually
0102030405060708090100
1991 1995 1999 2003 1978 1985
Market prices State guided State fixes
Share&of®ulated&price&for&industrial&transac3ons&[%]& Key&facts&
! Dual:track&strategy&represent&the&coexistance&of&both&systems&(socialism&and&capitalim)&during&some&3me&
! This&way,&the&number&of&loosers&due&to&the&reform&was&minimize,&while&the&old&ins3tu3ons&serve&as&second&best&op3on&beFer&than&abolish&them&all&at&once&&
Coal market (in million tones)
Labour market (in million people)
Planed
1981 1989
329 427
Market 293 628
Planed 74.5 112.1
Market 48.9 204.9
Examples:*
Source: OECD.
China has become the “world’s manufacturing plant”, having an economic model based on export
Source: Oficial stats.25
Foreign Direct Investment
Imports
Raw materials and components
Industrial activity
Exports
Components and semi finished goods
Chinese economic growth export model
This strong growth has been very uneven ...
Source: Oficial stats.26
Chinese GDP distribution
High Medium Low Very Low
Beijing Tianjin
Shanghai
Dalian
Nanjing
Xiamen Fuzhou
Hong Kong
Shenzen Guangzhou
Chongqing
Xi’an
Chengdu
Wuhan
Tsingtao
…and the same has happen in terms of Foreign Direct Investment
Source: Oficial stats.27
Foreign direct investment distribution
High Medium Low Very Low Very Low
China is among the countries that has benefit the most form globalisation developing region-states
Source: BBT Research Institut via Kenichi Ohmae.28
Chinese main economic clusters
Beijing Tianjin Dalian
Tsingtao
Shanghai
Suzhou
Fuzhou Xiamen
Hong Kong Shenzhen Guangzhou
Dongguang
Beijing / Tianjin Area
• R&D • IT, bio, space and defense • Government services
Liaoning Area
• Heavy industry, aircraft • Software • Japanese BPO
Shandong Area
• Heavy industry, aircraft • Software • Japanese BPO
Zhu Jiang Delta
• IT • Electronics components • Chemicals • Automobiles
Chang Jiang Delta
• Textiles • Automobiles • Laptops, mobile phones • Financial institutions • LCD panels
Xiamen / Fuzhou Area
• Agricultural products • Textiles • Taiwanese companies • Tea
Capital factor and total productivity factor had been the major drivers of Chinese GDP in the past
Source: Bloomberg.29
Real vs. potential GDP growth
Real%GDP%
Poten,al%GDP%
Capital%factor%TFP%Labor%factor%
Poverty has decreased world wide in the last three decades, specially in China
Source: Human Progress.30
Poverty rate world wide and in East Asia
Poverty has decreased world wide in the last three decades, specially in China
Source: Human Progress.31
Poverty in absolute terms
China has experienced the shortest Industrial Revolution
Number'of'years'required'to'double'the'real'GDP'per'capita'
RPC (1990-1998)
Japan (1885-1919)
US (1839-1886)
RPC (1981-1990)
Corea (1966-1977)
United Kingdom (1780-1835)
8'
9'
11'
34'
47'
55'
Source: IMF.32
In 3 years, China used more cement than the US did it a century
33Source: USGD; International Cement Review.
Cement usage in the US and China
The reform process is still today the main issue in order to understand Chinese economy
34
Summary chart: economic policies in China 1949-2006
Chinese Socialism 1958
! Chinese'economic'policy'based'on'the'Soviet'model'
! Agricultural'collec8viza8on''
! The'Great'Leap'Forward'(1958D60)'broke'with'Soviet'model.'Mass'mobiliza8on'of'resources'to'promote'Chinese'selfDsufficiency'
! The'Cultural'Revolu8on'(1966D76)'focused'on'poli8cal'consolida8on'
! Open'door'policy:'Built'on'a'principle'of'moderniza8on'and'emphasized'econoDmic'liberaliza8on'to'achieve'growth'
! This'policy'allowed'foreign'investment'in'China'for'the'first'8me'(SEZ)'
! Liberaliza8on:'A'liberaliza8on'and'priva8za8on'package'was'introduced'in'order'to'realize'China's'candidacy'in'the'WTO.''
! The'focus'of'the'CCP'was'to'enter'the'global'market'(while's8ll'restric8ng'poli8cal'freedom)'
Soviet-like system 1949
Open door policy 1978
Liberalization 1994
1960
The Great Leap Forward
1966 1976
Cultural Revolution 2006
Mao Zedong Mao Zedong Deng Xiaoping Deng Xiaoping, Zhu Ronji
China recognise that the institutions that work in one economy may not work in other economies
35
Key success factors of Chinese economic reform
• Existence of a real consensus. Chinese economic reform has had a clear objective since the beginning and had a real consensus of all society
• Gradualism: Chinese economic reform, in contrast of other former Soviet economies that had followed a “big-bang” strategy, has perform its economic reform step-by-step
• Existence of carefully designed strategy and the existence of mechanism that helped to drive the transformation of the economy step-by-step (e.g. SEZ, dual-track strategy)
• Decentralization, that together with pragmatism make possible that good policies spread around the rest of the country and that local governments adapt this policies to its particular region
• Customization of economic institutions. China chose its own institutions recognizing its unique case and its particularities
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