LECTURE 23: CHINA AFTER MAO

One of the leading authorities on post 1949 Chinese political economy, the late Gordon White, explored in his

book Riding the Tiger, post-Mao economic policy but began with the reasons for the failure of what he termed the

Maoist developmental state. He identified two main currents in Maoist thought on economic and political

development. The first was developmental Maoism, which emerged in tthemid-1950s and reflected Mao’s own

diagnosis of the defects of the imported Stalinist model. Soviet planners had given priority to heavy industry over

both agriculture and light industry and to capital-intensive rather than to labour intensive technologies. Mao

believed that China would have to ‘walk on two legs’ towards development, using intermediate and native as well

as advanced technology. It would have to encourage small-scale industrialisation by local collectives as well as a

large state sector; industrialise in the countryside and in the cities. The other feature of developmental Maoism was

its distrust of over-centralisation and top-down approaches. It argued for more decentralisation to local government

and to collective institutions, like communes and collective farms. This was the Maoism of the Great leap Forward.

The second strand of Maoist socialist development was radical Maoism. This approach argued that the ‘socialist’

society already established in China and the Soviet Union embodied powerful vested interests and incipient class

forces that obstructed the advance of genuine socialism and threatened ‘a reversion to capitalism’. Thus institutions

and people needed to be continually transformed alongside technical modernisation. In the words of one of the

Cultural Revolution slogans, ‘while the satellite goes up to the sky, the red flag falls to the ground’. The Party had

to be transformed into a radical force to counter these trends by mobilising ‘the masses’ under the banner, ‘the

mass line’. Policy and ideology in the Cultural Revolution decade mixed these two models of Maoism, but policy

and ideology were imperfectly matched. One of the features of the Cultural Revolution decade, as we saw last time

was that heavy industry continued to receive the lion’s share of investment, while agriculture and light industry

were virtually starved of resources. It was still a top-down society. Far from transforming society, the Cultural

Revolution appeared to immobilise it. For this reason, White talks about the failure of the Maoist developmental

state. However, that failure did not coincide with the death of Mao.

1976, Hua Guofeng and China’s Four Modernisations
1976 was a momentous year in Chinese politics. It began with the death of Zhou Enlai and continued with the

suppression of a demonstration of mourning for Zhou, probably with the acquiescence of an ailing Mao. In July, a

major earthquake took place in the northern coal-producing city of Tangshen in Hebei province, with deaths of

hundreds of thousands. Supporters of Mao and the radicals around him used the earthquake to thwart the renewed

political ambitions of Deng Xiaoping, who had recently been rehabilitated after his disgrace during the first phase

of the Cultural Revolution. This spectacle of using natural disasters as a means of furthering sectional political

ambitions convinced some of the highly placed but less committed radicals that these continual internal attacks had

to be stopped. China needed political stability to tackle serious problems in its political economy. The chief among

them was Hua Guofeng, about whom historians have very different perceptions. Some see him as a political non-

entity who happened to be in the right place at the right time to exploit the obvious difficulties in the Cultural

Revolution. However, Hua portrayed himself as Mao’s nominated successor and other commentators take this at

face value. It is certain that after Mao died in September 1976, there was a major power struggle. The radicals were

led by Jiang Qing, Mao’s wife, who wanted to succeed him as Party Chairman. But Hua emerged victorious and

had the leading radicals, the Gang of Four, imprisoned in October 1976. Then he had himself declared Chairman of

the Party, launched a major campaign against the supporters of the Gang of Four, and announced that before their

deaths both Mao and Zhou had agreed with him the basic principles of China’s future economic strategy. The aim

was to strengthen the Chinese economy and specifically ‘to accomplish the comprehensive modernisation of

agriculture, industry and national defence and science and technology and bring our national economy to the front

ranks in the world by the end of the century’. You see frequent references in the literature, even in book titles, to

China’s four modernisations. Hua was almost certainly correct in attributing the term to Zhou Enlai, but Hua

certainly was the first to articulate them to the Chinese political leadership at the end of 1976.

The return of Deng Xiaoping
Hua’s economic philosophy, as examined by Gordon White, was to return to developmental Maoism. He tried to

do two things, to modernise the economy at a very rapid pace while at the same time walking a political tightrope.

On the one hand he became the nemesis of the Gang of Four while at the same time he remained absolutely loyal

to the memory of Mao. Moreover, he attempted to do this as the casualties of the Cultural Revolution returned to

power and the Maoist propaganda of the Cultural Revolution period was totally discarded. However, Hua did not

really understand the economy. His four modernisations began with a huge effort to negotiate contracts with

Western and Japanese firms to bring advanced technology to heavy industry in China. But the critics, led by Deng,

pointed out that not only was the programme far too big for China’s infrastructure and foreign exchange reserves

to sustain, but the priorities were also misplaced. Deng and the reformers were determined to ditch even the

philosophy of ‘developmental Maoism’. They criticised Hua and his supporters as ‘whateverists’; whatever Mao

said was right. Hua’s reform ground to a quick, rather inglorious halt, and Hua himself did not last long, losing

most of his influence by 1981, even though the first phase of the four modernisations worked well. Even from the

end of 1978, reforms were introduced into agricultural policy (see below) that saw a bigger role for the market and

free enterprise in the countryside. The economy began to accelerate forwards and enabled Deng to surround

himself with long-standing supporters many of who had also been purged at the start of the Cultural Revolution.

    Deng’s position was always interesting. Although he liberalised, introduced market signals, opened the

economy and allowed western capital to establish joint ventures in China, he continued to warn against ‘bourgeois

liberalism’ in China. Like Hua, he enunciated four cardinal principles for China’s modernisation (in March 1979,

in one of his first really major speeches after his return to power), but these were all political:

   We must keep to the socialist road

   We must uphold the dictatorship of the proletariat

   We must uphold the leadership of the Communist Party

   We must uphold Marxism-Leninism and Mao Zedong Thought.

Thus economic liberalisation in no way implied political liberalisation, though he certainly introduced substantial

reforms of the political structures inherited from the Maoist era. Some political freedoms were increased and

attempts were made to separate the Party more clearly from the government, with fewer leaders holding prominent

positions in both hierarchies.

         Deng also led the way in reassessing the position of Mao being especially critical of his role in the

Cultural Revolution. But this too needed to be a carefully calculated enterprise. Too much criticism of Mao called

into question the legitimacy of the CCP and so the technique was to pile criticism on the Gang of Four and the

army leader, Lin Biao, who had died in rather mysterious circumstances in 1971. Mao’s position in the CCP was

just too towering to allow him to be discredited. The group around Deng was striving for a high material standard

of living combined with a high level of ‘socialist spiritual civilisation’, and this latter term implied that the people

should accept a working-class world outlook, communist ideals and belief in the utility of collectivism. To western

eyes, these appear inconsistent with market freedoms in the economy and there is a very strong school of western

political economy (the Austrian system as developed by von Hayek and others) and an emerging vision of the

politics of development (associated with Adrian Leftwich) which argue that economic and political liberty are

interdependent. Clearly Chinese leaders since Mao have not seen the world in this way.

         The responsibility for balancing economic reform with the limitation of political change lay on the

shoulders of Deng himself. He placed very radical economic reformers in the leading positions in the Party and the

government, but tended to side with the older guard of political conservatives (in the sense of wanting to retain the

primacy of the Party) whenever they jibbed at the proposals to reduce Party control or power. However, a careful

political balance within the elite is one thing, holding this line in the wider country is something else entirely.

The Democracy Movement
Unfortunately, while the balance within the ruling elite was fluctuating between those who wanted to extend some

liberalisation to the political system and those who opposed it, the intelligentsia and the student movement had

become much more favourably disposed to western ideas and practices. What they admired about the West was the

spirit of democracy, freedom and innovation, and the pace of change that flowed from political liberalisation.

Many became uncritical supporters of Western ideas and institutions and hypercritical of all things Chinese. Above

all, there was the example of the democratising states of East Asia, which were also beginning to excite attention in

Europe and North America at the pace and scale of their economic transformation and the political liberalisation

that accompanied it. They were particularly critical of the corruption and inflation that had attended the Chinese

pattern of economic reform during the early 1980s and, stirred up by leading anti-Party intellectuals, took to the

streets in most of the major cities of China during 1986. Corruption and inflation are important not only for

themselves, but they were a sign that the fruits of reform, which had promised so much in the later 1970s and early

1980s, were not reaching the mass population at the previous rate. Thus, from the leadership perspective, these

student protests ran the risk of igniting popular protest. In particular, they were worried about the possibility of a

Polish-style revolt among the workers and the formation of something like a Chinese Solidarity independent trade

union movement. In typical Chinese fashion the first reaction to these protests was to react severely, and leading

radical reformers were quickly purged in 1987, but this only encouraged the reformers to regroup and to maintain,

even accelerate, the pace of reform in 1988. The leading reformers managed to place their own people in more

leading positions than they had held in 1986.

         However, reform could deliver neither the degree of political freedom desired by the student movement

nor accelerate the pace of economic improvement in the face of growing corruption and inflation. The student

protests gathered momentum in late 1988 and the first half of 1989, culminating in a big protest in the centre of

Beijing, in Tiananmen Square. The leadership seems to have been seriously split over its policy towards the

students, not least because the protest took off when Gorbachev, who had introduced political pluralism to the

Soviet Union, was visiting Beijing. When Gorbachev left Beijing the conservatives, with the support of Deng,

were strong enough to force leading radicals out of the Politburo and sufficiently assured about the loyalty of the

army to impose martial law and clear the streets. The period of strict central control lasted until 1992, when Deng,

who had officially retired from all his positions within the Chinese political system, suddenly re-emerged on a

southern tour of inspection of the special economic zones. This was another green light for reform, and the pace of

reform again accelerated until the death of Deng in 1997.

         That year also saw the return of Hong Kong to Chinese control, which seemed to underwrite the trend to

economic reform, while calling into question the ability of the Chinese establishment to negotiate political reform.

Nonetheless, China is the only major socialist country to have withstood the political maelstrom of 1989-90, and

has done so by re-invigorating its economy in a fashion that was beyond the European socialist states. So we ought

to look at the reforms to agriculture, industry and China’s external economic relations. In all these areas, the

central concerns have been to control decision-making powers from the centre to the producers themselves while at

the same time introducing, to varying degrees the laws and institutions of the market. Since agriculture remains the

largest employer in China, that is where we should begin.

Agricultural reforms
As we saw in the last lecture, agricultural policy under Mao had involved an intricate two-step, involving the

collectivisation and co-operative farms favoured by Mao to build a socialist peasantry, and the use of market

incentives by those who wished to induce the peasant more directly to increase the output of marketed grain. After

Mao, the focus has been entirely on the peasant as individual producer, or member of a household production team,

and the drive towards collectivisation has been pushed far into the background. The main development has been a

policy called the ‘household contract responsibility system’, which essentially implies that individual households

make contracts with the state to supply agricultural products, especially grain, on land leased from the state. The

central feature is to give responsibility for managing the land and taking the decisions about what to produce and

care of both the land and the crop to the household but at the same time retaining collective ownership of the land.

Cultivation rights can be passed down to children so as to give the household the incentive to improve the land.

The original contracts lasted 15 years, but in the early 1990s the state announced that henceforth it would move to

thirty-year contracts at the next round of re-negotiation. Co-operative farms have a role in this system in assuming

responsibility for more broadly based activities, such as water conservation and irrigation, pest control and other

related services. The state bought the contracted amount of grain at a fixed price and then sold it on to consumers

in the cities at lower prices, thus having to pay a subsidy to final consumers. Peasant households have been free to

sell on the open market whatever they produced after the contractual quotas had been fulfilled. Clearly,

competition with subsidised prices was not easy and many peasants also chose to sell their surpluses to the state.

         This system was extremely successful. Agricultural output rose by 7 percent per annum in the period 1978

to 1984. Although grain production did not grow at this rate, it increased faster than population and rapidly enough

for the central leadership to introduce further reforms in a similar vein in 1985. The government improved rural

transport services to allow peasants cheaper more direct access to urban centres with encouragement to sell straight

to final consumers in the hope that agricultural production would then become more sensitive to shifts in market

demands. In other words, peasants would respond to price signals. But the state also reduced the price at which it

bought grain and ceased to contract for specified deliveries of key crops. The Chinese peasantry did indeed

demonstrate its sensitivity to market signals by growing less grain and diversifying into crops that would fetch

higher market prices, with sometimes disconcerting results for the leadership. The difficulties for the leadership are

best captured in an often-repeated conundrum: how do you feed 22 percent of the world’s population from 7

percent of the world’s cultivated land? China has managed by entering the world market to cover serious shortfalls;

there has been no repeat of the catastrophe of the Great Leap Forward. But its ability to finance grain imports

depends upon its ability to earn export revenues, and that focuses attention on industrial and foreign trade reforms.

Industrial reforms
The reform programme began with agriculture in the late 1970s and did not address industry in any concerted way

until the early 1980s. The Chinese approach has contrasted strongly with that of Eastern Europe. China has

managed the transformation from a command to a (socialist) market economy by cautious experimentation – in the

words of Deng Xiaoping, ‘crossing the river by feeling the stones’. There has been no shock therapy, as advocated

by US advisers in Russia, the Ukraine and elsewhere in Eastern Europe. But the attempts to modernise the state-

owned enterprises (SOEs) upon which so much attention and scarce capital was lavished in the 1950s and 1960s

have met with very mixed results. The SOEs remain inefficient, where they are still in production, and are a barrier

to economic modernisation.

         Under the system of central planning, the state had instructed the SOEs on what to produce and how to

produce it. Enterprise management tended to be subordinate to administrative control. However, a market system

needs entrepreneurs to take these decisions in response to market signals and appreciations of risk, and so the

general direction of industrial reform has been to pass responsibility to enterprise managers. There has been a

steady stream of reforms during the 1980s and 1990s attempting to define the responsibilities of the state as owners

of SOEs and the managers as organisers of what takes place within the factory walls. However, the granting of full

autonomy to enterprises has been patchy. In 194, the World Bank found that 90 percent of the 156 SOEs that it

surveyed claimed to be free to make decisions on production, sales and selection of suppliers but 60 percent

reported continuing state interference in the rights to trade, dispose of assets and to conduct mergers. Perhaps as a

result, the production record of SOEs has been patchy. The most significant problem has been the scale of these

production units. As we saw in the previous lecture, Chinese heavy industries were built on the Soviet model of

huge production units that needed to work continuously and at full capacity to reach reasonable levels of

productivity and efficiency. The system could work reasonably effectively for so long as the centre dictated the

pattern of demand and capacity and demand were matched.

         However, as soon as responsibility for the production and pricing decisions are devolved to the enterprises

themselves, they have to face the fact that market demand for their output is limited and they cannot produce at

efficient volumes. In 1996, a World Bank survey suggested that half were operating at a loss and the tendency

since then has been to close unprofitable factories in part by what amounts effectively to privatisation; selling

shares in them to private individuals and other enterprises. The major sufferers from this policy change have been

the employees, since SOE workers tended to receive a substantial range of social welfare benefits from the

enterprise to supplement often meagre rates of pay. For many, medical care was administered via the enterprise, so

the closure or sale of the firm results in unemployment and the withdrawal of medical care. This was a very

unpalatable policy decision for the leadership, but the SOEs were absorbing huge amounts of credit as they failed

to cover their costs of production, and this was helping to fuel inflation. The costs of not facing up to this problem

was greater than the costs of closing inefficient plant. Slowly, in the 21 st century the leadership’s policy has

become clear. SOEs have been closed as the employment opportunities elsewhere in the economy have increased.

The social consequences have however been dire because of the geographical separation between centres of heavy

(SOE) industry and the areas of rapid economic and employment growth, the special economic zones. This has

made the leadership more concerned than ever about preventing social protest.

         If the problem of inefficiency has been tackled slowly, corruption has not and remains a major cause of

popular discontent. In 1995, Transparency International, an anti-corruption organisation, rated China as the second

most corrupt economy in the world after Indonesia. The real problem concerns the incomplete transition of the

Chinese economy to a market system. Markets have emerged for many goods and services but they have remained

subject to interference by officials who can change the rules under which markets are supposed to operate. One of

the basic requirements for efficient market allocation is general access to credible and reliable information about

supply, demand, costs and a range of other variables. However the Chinese economy has not yet reached the level

of development to make reliable market information freely available. Accordingly, enterprises invest heavily in

lobbying the managers of the system by building informal networks of well-connected and influential officials.

Under such arrangements corruption will become endemic. Corporate governance is inadequately developed,

enabling unscrupulous entrepreneurs to defraud shareholders, workers and suppliers. For those who know any

economics, there is a huge principal-agent problem as a result of asymmetric information flows. The problem is an

intense one for the leadership since the ordinary Chinese now routinely regard Party and government officials as

corrupt. It is difficult to see how the leadership of the Communist Party can be maintained if the mass of the

population come to regard its officials as self-serving, venal and immoral.

Foreign trade and investment
During the 1950s and 1960s, China followed the common path for developing economies of import substitution

industrialisation (ISI). In other words, imports were heavily restricted by tariffs (taxes on imports) and quotas

(quantitative restrictions). The idea was to enable ‘infant’ industries a phase of protection from foreign competition

to enable them to progress to efficient levels of production. The main problem with ISI is that by shielding

industries from foreign competition, there is no real incentive on domestic producers ever to become efficient. That

tendency is compounded when, as in the Chinese case, the avoidance of internal competition is also part of the

strategy. The socialist development path is invariably to create large-scale producers that are effectively domestic

monopolies that are also shielded from competition from imports (though capitalist developing economies have

tended to follow exactly the same path). The common pattern is for levels of protection to rise over time, because

these large-scale producers become relatively less efficient when compared to the world market. It is not

uncommon for countries in this position to have something to offer to the world market in order to earn foreign

exchange to pay for what the domestic economy cannot supply. China was in a double bind. It always needed to

pay for technology imports, even when relations with the USSR were close. It also needed periodic entries into the

world market for food when domestic agriculture failed, as in the GLF.

         After the death of Mao, it was recognised that the technology of Chinese industry needed rapid

transformation and that foreign trade was the quickest method of acquiring new technological standards and a

faster pace of economic development. China has become one of the two biggest recipients of foreign capital. Under

Mao, foreign trade represented a small proportion of Chinese national income and China’s exports and imports

represented less than 1 percent of total world trade, a tiny proportion given China’s share of world population.

China was in effect isolated from the world economy, and that was one of the objects of policy. The opening up of

China after 1976 began very spectacularly with the opening in 1980 of four Special Economic Zones (SEZs). This

was in fact a policy borrowed from other parts of Asia, especially Taiwan, where special zones were established in

which firms were given special privileges and were expected to produce for the export market. Indeed, the whole

idea of opening up was based on the superior growth performance of the East Asian Tiger economies in the 1960s

and 1970s, when they had abandoned ISI and turned instead to export-led growth and more openness to imports.

         Deng described SEZs as ‘windows for technology, management, knowledge and foreign policy to better

serve China’s modernisation programme. They were conceived as segregated enclaves designed to attract foreign

investment and technology in order to boost China’s foreign exchange earnings through exports. They were also

seen as experimental sites for market-oriented structural reforms, with a view to discovering what might be

successful and ripe for transfer to other parts of the Chinese economy. For foreign firms, SEZs offered cheap

labour, tax concessions and ready-made factories and similar infrastructure. The tax concessions were extremely

important. Firms in SEZs got their raw material and capital goods imports duty free and paid tax at lower rates than

firms in other parts of China. Foreign firms were guaranteed freedom to manage their enterprises as they saw fit. It

took a little time for this initiative to gather momentum, but they began to attract large amounts of foreign

investment and the number of SEZs was expanded in the mid-1980s, though these cities were given rather fewer

privileges than the five original SEZs.

         The fastest growing of all these initiatives was Shenzen, the SEZ just over the Chinese border from Hong

Kong and the rate of growth of the region has been huge. Migrants have been attracted from all over China to seek

work in the new factories. Foreign firms, seeing the success of the early movers into the SEZ have flocked into the

region. Thus the rapid growth of these new industrial areas has helped the economy cope with the contraction of

employment in the SOEs and the growth of exports has helped the Chinese economy but the impact should not be

exaggerated. The foreign-invested enterprises tended to assemble products from imported parts and components.

Foreign investors were making maximum use of China’s cheap labour. This means of course that export earnings

are to a significant extent balanced by the higher import bill and that the gains to the wider Chinese economy are

limited as foreign investment was concentrated in labour intensive, relatively low tech operations. This precipitated

changes in the policy towards SEZs during 1996 and 1997 designed to foster higher technology activities and to

deter those based more heavily on exploitation of cheap labour.

         During the Mao period, ISI implied very fierce controls over foreign trade and the need to conserve

foreign exchange for priority transactions as determined by the leadership implied immensely restrictive controls

over foreign exchange. The liberalisation of these rules for the SEZs has brought a major change in China’s

integration into the system of world trade and payments. In the late 1970s, China signalled its willingness to re-

enter the international system by borrowing from the IMF to finance Hua’s over-ambitious programme of imports.

In 2001 China was admitted into the World Trade Organisation, which imposed upon it the obligation of

dismantling all the machinery of its ISI policy. In the early 1990s, China’s share of total world trade exceeded that

which it had recorded in the 1920s. The projections for the first two decades of the present century are for China to

become one of the most powerful trading nations. In 1978, China was ranked 32 nd among the world’s international

trading nations. In 1991, it was 15th and in 1996 11th. Between 1979 and 1996, exports rose at an average rate of 16

percent per annum, and imports by 15 percent per annum. Trade was growing faster than national income and was

the engine of growth in the Chinese economy before the East Asian crisis of 1997.

China’s achievement before the East Asian crisis of 1997
Despite the problems with the SOEs and the turbulence in China’s institutions and policies since the end of the

Cultural Revolution, the Chinese economy has recorded very impressive rates of growth in the last quarter of the

20th century. There are however difficulties in measuring the precise rate of growth. What account does one take of

the collapse of the SOEs? How does one value the Chinese currency against other currencies when exchange rates

have been heavily administered and when inflation has been a consistent and substantial problem. To give you an

idea of the scale of the difficulties, it is interesting to look at the review of the estimates of China’s economy in

Nicholas Lardy’s book, China in the World Economy (1994). He took nine separate estimates of China’s GDP for

1991, 1992 and 1993. The estimates they gave of China’s GDP per head ranged from $370 to $2,598, which is a

huge margin. I know of no other economy where the estimates cover such a wide range. The cause of the disparity

is the difference between the official exchange rate (the lower level estimates) and what economists believe to be

the actual purchasing power of the Chinese currency (the higher estimates). To make accurate comparisons of

purchasing power parities requires accurate and detailed information about prices and the structure of GDP and

this was not always available to some of the investigators. We are left simply to ponder the scale of the differences.

Lardy himself favours an estimate of approximately $1,000 per head, which would put China among the middle

income nations of the world rather than among the low-income nations, which is where the World Bank places it.

         If there is much disagreement about the exact level of Chinese living standards, there is much less dispute

about the rate of growth. The Chinese economy grew at approximately 3 per cent per annum in the 1960s, the

decade of the Great leap Forward and the Cultural Revolution. In the 1970s, that rate rose to 7.5 per cent per

annum, and in the 1980s to 9.2 per cent per annum and the average between 1990 and 1995 was 12.3 per cent per

annum. The record of the 1990s was doubly spectacular, since it combined quite sluggish growth rates in 1990,

when the democracy movement was suppressed and the controls came down, and a huge acceleration in 1992,

1993 and 1994, when real GDP grew at approximately 14 percent per annum. Exports continued to grow faster

than national income; for example, in the period 1990-95 exports grew at an average annual rate of 19.4 percent

per annum. As you might expect, imports also grew rapidly (at about 15 percent per annum) but at slightly slower

rates than for exports. This is a powerful demonstration of the massively positive impact of integration of the

Chinese economy into the systems of world trade and finance. But like other East Asian economies, China had to

undergo a major shock at the end of 1997 when financial difficulties in some of the smaller regional economies

combined with more deeply entrenched sluggishness in Japan to produce the East Asian financial crisis.

China since 1997
Despite its exceptional growth record in the mid-1990s, China was not immune to the suspicion of Asian

economies shown by international financial markets after 1997. For the region as a whole, the flow in 2000 was

one third of that of 1997 but China has been hit less hard than the average. On the darker side, the leadership has

often experienced in its hybrid system the worst results of socialism (bureaucracy and lassitude) and of capitalism

(windfall gains and stepped-up inflation). Beijing thus has periodically backtracked, re-tightening central controls

at intervals. The government has struggled to (a) collect revenues due from provinces, businesses, and individuals;

(b) reduce corruption and other economic crimes; and (c) sort out its policy on the largest state-owned enterprises.

From 80 to 120 million surplus rural workers are adrift between the villages and the cities, many subsisting

through part-time low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural

cadres have weakened China's population control programme, which is essential to maintaining growth in living

standards. Another long-term threat to continued rapid economic growth is the deterioration in the environment,

notably air pollution, soil erosion, and the steady fall of the water table especially in the north. China continues to

lose arable land because of erosion and economic development.

          Because of its role in supplying cheap, unsophisticated manufactures, China has suffered falls in demand

for its exports when the world economy turns down, as it did in 2001. Beijing intensified its efforts to stimulate

growth through spending on infrastructure--such as water control and power grids--and poverty relief and through

rural tax reform aimed at eliminating arbitrary local levies on farmers. But expenditure on these policies meant less

support for inefficient state-owned industries, and the closure programme accelerated. Nevertheless, growth was

maintained at reasonable rates throughout the post-crisis period and the accelerated closure of SOEs has been seen

by many western commentators as a necessary economic policy, albeit with unpredictable political consequences.

It was hoped that China’s entry into the World Trade organisation would resolve many of the problems by bringing

down the inefficient companies while giving new opportunities to the profitable and combining these economic

reforms with much needed political change, making the government more transparent and accountable to its



However, these were always exaggerated hopes and the actual practice has uncovered many examples of local

government officials acting to discourage foreign investment and supposedly neutral regulators trying to protect

local industry rather than acting as agents of economic modernisation and restructuring. None of this can detract

either from the growth record or from growing evidence that the modern industrial sector in the eastern coastal

areas is operating at internationally competitive standards of efficiency. The massive migration of population from

rural, agricultural areas in the west of the country is keeping down wage rates and enabling China to become a very

low cost producer. This in turn has caused foreign investment to continue to flow to China despite the wider

problems of the East Asia region.

         The fly in the ointment is however the relative absence of political reform. The influence of the

Communist Party remains almost universal; the legal system is headed by judges who are subordinate to the Party.

Very few of China’s judges are legally trained and able to decide issues on the legal merits. The Chinese

government is involved in industry at every level and most of the joint ventures launched with foreign investors

will have Party or government representatives on the board. Under the WTO rules, China needs to establish

principles of regulation for industrial policy and competition, but the idea of an independent regulator is almost

unknown in China – except in the areas where foreign business is heavily represented. Local government in cities

such as Shenzhen, where foreign investment has concentrated, has recognised the need to create systems that allow

more even competition between foreign and domestic firms if more inward investment is to come to their cities.

Thus, the overall impression of China post 1997 is of small, but possibly significant, steps towards a more liberal

regime and with reform and change concentrated on the east and south coasts, but with comparatively little change

occurring in the interior – apart that is from long-distance migration to the east as a result of peasant hunger.


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