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Lecture 3

THE CHINESE ECONOMY

The Socialist Era

www.youtube.com/watch?v=3XIyb1NMZaQ

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• How China was lost ? (to communism)

• Down with colonialism, feudalism, imperialism, capitalism,,,,

• The “Big Push” Industrialization• The early achievements of coastal enclave industrialization were discarded, and a

new inward-directed strategy was adopted

• Poured the resource into capital-intensive heavier industries

• Take the Soviet Union as its primary model

• Differentiated from Hong Kong and Taiwan

• The “Command Economy”• The government took over all large factories and transportation and communication

enterprises

• Planners issued commands that assigned production targets to firms/product units and directly allocated resources and goods among different producers.

• Government controlled the price system

• Hierarchical personnel system

• Economic Recovery, 1949–1952• War damage

• Hyperinflation

• A trade boycott from Western due to the Korean War

• Push China into an isolation and especially close embrace with the Soviet Union

• The twin peak of the first five-year plan 1953 and 1956• A period of nearly constant policy change and adjustment

• In the first peak (1953), investment was ramped up quickly as part of the beginning of nationwide investment planning on the Soviet model.

• During the second peak of transformation, the “High Tide of Socialism,” in 1955–1956, the transformation to public ownership was abruptly pushed through

• The shift of policy led immediately to the organization of virtually all peasants into agricultural cooperatives – land reform after revolution, nationalization of industries (no more private participation)

• The year 1956 was thus the first year that China operated a fully “socialist” economy.

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• Retrenchment: The “hundred flowers” of 1956-1957• Chinese policy pronouncements had swung 180° from those of a year earlier

• Economic liberalism spread gradually into the political domain

• A movement labeled the “Hundred Flowers.”

• In 1950s, HK and Taiwan experienced rapid industrialization.

• The Great Leap Forward, 1958–1960• The most dramatic, peculiar, and ultimately tragic period in the history of the PRC

• Simple intensification of the Big Push strategy: backyard steel mills

• Product of a “vision, rather than a plan”

• “Anti-Rightist Campaign”

• Growth was somewhat real, but the reports were also inflated

• In 1960 full-blown famine burst upon China, about 25–30 million excess deaths occurred

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• Crisis and “Readjustment,” 1961–1963 • Agriculture had been seriously weakened by misguided policies

• Drained agricultural labor into industries, not enough agricultural output

• Focused on heavy industries, neglected light industries and services (no services)

• Control over the economy was recentralized in an attempt to restore order.

• Existing production was reoriented into agriculture

• China became a net importer of food (from Soviet)

• Free markets reopened

• Imports of consumer goods and market liberalization gradually stabilized prices

• The new draft plans envisaged rehabilitating existing industrial bases in the coastal regions and concentrating new investment in industries

• Breakup with Soviet Union and withdrawal of Soviet experts

• The Big Push strategy was firmly reestablished

• A militarized and regionally redistributive

• The Third Front dominated economic construction from late 1964 onward due to the arms race and nuclear weapons!

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• The Cultural Revolution, 1967–1969• Cultural Revolution: an entire era dominated by a radical leftist political rhetoric

To root out all dissident views

• Use young people to revive the revolutionary spirit and cleanse China of bureaucratic tendencies or dissenting voices/ideas

• Produced a lot of dramatic new political imagery that inspired the rest of the world but had relatively little effect on the economy

• The Maoist Model: A New Leap in 1970• Maoist model a distinctive variant

1. Pervasive militarization of the economy.

2. Decentralized operation of the economy.

3. Relative autarky or self-reliance was practiced.

4. There was an almost complete absence of material incentives

5. Market-driven labor mobility virtually ceased.

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• The Legacy of Policy Instability• It generated profound dissatisfaction with the standard socialist system

• The reformers had learned the problems of the planned economy and they were aware of potential alternatives.

• The Shortcomings of the Development Strategy• The consumption was neglected

• Rationing and un- or under-employment due to urbanization

• The urban–rural differential was significant

• Growth in services was neglected

• The shrinkage of the retail sector (ignoring market/demand)

• Employment creation was relatively slow (ding ti)

• The industrial investment was not only capital-intensive, but also relatively demanding technologically. The capital was tied up for many years without producing output.

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• Consolidation and Drift, 1972–1976 • Industrial growth was once again outpacing agricultural growth

• Economic relations with the capitalist world were reestablished (import)

• No systematic economic policy

• One child policy instituted

• The Leap Outward: 1978 and the End of Maoism • A new leadership by Deng turned its attention to economic matters

• Nixon visited China

• The “leap outward” collapsed of its own weight

• China’s effort to develop its oil fields and other big projects to increase exports was running into unexpected obstacles

• Hong Kong and Taiwan as good examples!

• The Third Plenum and the Beginning of Economic Reform• Initiated a new era in the Chinese economy and in Chinese politics

• The return to power of Deng Xiaoping

• New policies were adopted

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+ Shortage and limited variety of goods.

+ Shoddy products with poor quality

+ Rationing system

+ Through state-controlled channels of distribution

+ For everything you needs

+ Market or marketing – what is that? It did not exist!

+ March 14, 2006 WSJ has an article ("China's Winter of Discontent," p. B1; sorry no link) that demonstrates the folly of using central planning to produce and allocate goods and services. An excerpt:– Heating systems are one of the last areas that remain under China's

former centrally planned economy, with government regulators still setting the thermostat for homes, classrooms and offices across the country. Under the policy, which dates back to Mao Zedong in the 1950s, the government provides heat in the northern half of China, and, to save money, it provides no heat in the southern half. As a result, northerners often wilt in steaming apartments, while those in southern provinces shiver through the winter.

– http://divisionoflabour.com/archives/002391.php

+ The Collapse of Soviet Union: winter in Russia+ The limitations and follies of central planning