CHINA
The Great Awakening
Historical Background
The People’s Republic of China developed
from:
The Soviet central-planning system…
…with its information, incentive,
and inflexibility problems.
Historical Background
The People’s Republic of
China developed from:
2. Cultural confusion and
economic disaster
stemming from Mao
Zedong
China Under Communism: 1949-
1978
The Great Leap Forward, 1958-1960
• Mao’s version of Soviet Style Central
Planning
• Forced industrialization
• A steel mill in every back yard
• Disappearing tools and famine
China Under Communism: 1949-
1978
The Cultural Revolution
• Deng chief of the “capitalist roaders”
• Red Guards and permanent revolution
• Movement to the countryside
Enter Deng Xiaoping,
(Three Times Altogether)
The Reforms of
Deng Xiaoping
Phase 1: Reform the Countryside, 1974-1978
• Private plots and state farms in agriculture
• Higher state procurement prices
• Quota at state prices, excess for market
prices
• Sale of surplus for cash
The Reforms of
Deng Xiaoping
Phase 2: Financial and Enterprise Reform
• 1983, SOEs must meet negotiated targets,
but can then sell in markets.
• Managers set wages, make investments,
retain profits.
The Reforms of
Deng Xiaoping
• An “open door policy” announced 1979
– Four “Special Economic Zones” were
created with
• Tax incentives
• Foreign exchange provisions
• Lack of regulations
• Markets function!
SEZs located in:
• Guangdong Province
• Fujian Province
• Hainan Province
• Hunchun
• Pudong Development Zone (Shanghai)
The Purposes of SEZs
• As a laboratory to provide experience for
inland regions’ economic reform and
development.
• Promote Inflows of foreign investment,
technology, and managerial techniques
Policies in the SEZs
• Domestic decentralization, no planning or
regulation from center
• Tax incentives to foreign investors
The Result: an Example
• Shenzhen, a small border town, changed
into a modern city
• In the early years, the average annual
growth rate was over 80 percent
The Result: an Example
• Per capita GDP was 7 times the nation’s
average
• Foreign investment and exports have been
the primary engines of economic growth
Shenzhen: The Early 1970s
Shenzhen: Today
The Reforms of
Deng Xiaoping
Phase 2: Financial and Enterprise Reform
• The economic boom continued, but…
• There was political rebellion (Tiananmen
Square, 1989) and subsequent retrenchment
But Communistic Legacies Remain
• The State-owned enterprises remain a
part of contemporary China, and they
need reforms.
• The Communist Party of China remains
and needs reforms.
• Authoritarian methods and bureaucratic
traditions likewise remain.
SOEs and their Reform
What Causes The Problems?
• Central economic planning rather than
market economics
• State Owned Enterprises (SOEs) need
shutting down: they serve a social
(employment) function rather than an
economic function
Where is China at Today?
• The Asian Crisis after the mid-1990s
slowed the economy down
• Incredible growth rates become more
difficult to sustain with growing maturity.
Effects: Growing Maturity and
the Asian Crisis
China's Economic Growth
10
8
6
4
2
0
1996 1997 1998 1999
The Old Guard: Passing from the
Scene?
Jiang Zemin, Deng’s heir to power
The Party Today
Hu Jintao,
Elected General
Secretary of the CPC
and President of the
People’s Republic of
China,
March 15, 2003.
The Current Scene
• China has retained an open economy
• There has been a long period of
sustained, rapid economic growth
• The huge market is a magnet for
investments and trade
The Current Scene
• The global economy puts tremendous
pressures on China’s political system.
• Change is gradual, since the party wishes
to perpetuate its own power, but change
does go on.
• Reforms are tentative, the party is not
moving quickly toward price liberalization,
currency convertibility, or reduction of
subsidies.
The Bureaucracy
• Although bureaucracy constrains the
devolution of power, the decline of the
party’s power was made possible through
the person of the general secretary.
• Since Deng, we have not seen dramatic
individual leadership, but plodding,
collective leadership.
Political Leadership Since Deng
• The current regime feels fairly secure in
having demonstrated peremptorily at
Tiananmen Square a willingness to
assume a “comply or die” stance.
Leadership Since Deng
• As a result, the party has probably
guaranteed that those favoring political
liberalization will never again give support
freely. It is not highly probable that the
CPC will be a part of a peaceful evolution
all the way to democratic government.
Political Environment Since Deng
• The process of democratization began at
the same time as the economic reforms,
and modest progress has been made
since.
– Officials falling out of favor are retired rather
than executed.
– Retirement permits promotion of younger
officials resulting in more harmonious
government.
Political Environment Since Deng
– Purges no longer occur
– The National People’s Congress has been
strengthened
– The legal system has been reformed to
prevent any further cultural revolutions.
Individual acts of selective repression by the
party continue, but mass repression has been
absent since the Tiananmen Square debacle.
Political Environment Since Deng
• With the passage of time, stronger market
and international forces will press the party for
further human rights progress.
• The world’s focus on the Olympic Games of
2008 will encourage progress.
Unpremeditated Devolution
• Greater independence of the Special
Economic Zones made the retention of
central control more difficult for Beijing.
• In 1993, Beijing attempted to enforce economic
austerity, but the policy failed mostly because of
the resistance of the more prosperous provinces
that were earlier the SEZs.
What is China’s Future?
What is the Future of China’s Market?
Proposition:
The planning system constrains market
development and growth.
China’s bureaucracy, “colossal even before
central planning was adopted,” continues
to function (or hinder functioning).
Authoritarian Controls still needed?
• The Party believes that the process of
economic development will require
authoritarian leadership for some time to
come. Dissent will have to be managed
while painful reforms are administered to
the SOEs and their hundreds of millions of
employees, millions of which will likely
have to be sent into unemployment.
Building Markets Over Time
• But the state now controls less than half the
economy and owns less than a quarter of it.
• The abrupt elimination of plan and party in
the Soviet Union left no time for market
institutions to be developed.
• The Chinese have been developing markets
and market competence gradually.
Building Markets Over Time
• Functioning markets require much
management: banking and finance
institutions, labor legislation, regulation of
industry, environmental regulation,
regulation of competitive activities, and of
international trade.
Jiang ZeMin
Reforms
Economic Reforms
• Effort to reduce labor hoarding
• Substitution of a contract system for life-
time employment guarantees
• Development of a wider wage distribution
as an incentive for labor
Economic Reforms
Reforms have also attempted to:
• Allow management greater decision-
making prerogatives
• Impose greater accountability for the
bottom line on enterprise management
• Promote greater labor discipline on the
shop floor.
Chinese Communist Party Statement
July 1, 2001
“Most people in the private sector are engaged in
honest labor and work, obey the law, and contribute
to society. Henceforth, the best of them will be
allowed to join the party.”
i.e., Capitalists can join the party!
- Jiang Zemin, Party General Secretary
Market or Market Planning?
• The market continues to coexist with the
plan. The SOEs continue to exist at great
cost. Planners make managerial decisions
without information available at the
enterprise level.
The SOEs and Unemployment
• By 1998, nearly 1/3 of the
labor force was
unemployed or
underemployed.
• Millions of SOE
employees were laid off in
the late 1990s.
The SOEs and Unemployment
•The SOEs are supposed
to provide unemployment
help, but many are unable
to.
• Millions became itinerant
wanderers when they
couldn’t find private sector
employment
Market or Market Planning?
• Central planning destroys incentives,
isolates the planned economy from world
markets, produces technological
stagnation, brings mining and
manufacturing to the brink of ecological
disaster, and taints the economic future
with destructive legacies.
Market or Market Planning?
• The Soviets dropped planning to rebuild
from nothing, corruption filled the vacuum.
In China, we wait for the other shoe to
drop. When will central planning be
dropped from the core economy.
• The last party congress promised it would
be, but offered no published time plan.
Market or Market Planning?
• Will China simply gravitate toward a
typically statist planning similar to other
major countries in Asia, e.g., Japan and
Korea?
• Those systems have been struggling since
the Japanese depression and the Asian
Crisis broke out.
Market Regulation
• Learning to design and implement
regulatory measures may be as difficult for
China as it is currently to control corruption
or collect taxes. Such implementation
requires a complex set of administrative
agencies and policy enforcement
mechanisms.
• Nor is keeping regulation at reasonable
levels a simple task.
Can market and plan be combined?
• Overall economic direction includes
protection of inefficient industries, fixing
the value of the yuan, and statist planning
at the regional level.
• Picking industries, subsidizing, and
protecting them has been common. There
has been a tendency to pick identical
industries and generate excess capacity.
Can market and plan be combined?
• But Chinese gradualism may prove less
painful than the Soviet transition. It can
begin to learn how to promote, manage,
and regulate markets even before the
planning sector disappears.
Schumpeter and Social Groups
• The roles played by particular groups,
such as managerial and academic
leaders, was addressed by Josef
Schumpeter.
• Social leaders, the professional and
technical classes, will articulate the
demand for material, educational, and
other improvements.
Schumpeter and Social Groups
• Surveyed Chinese managers have
expressed their preference for the
development of market structures and
democratic initiatives as the country
modernizes. They seek more
– personal freedom,
– individualism,
– autonomy and
– self-responsibility
Another Chinese advantage:
An Open Economy
• Deng’s early desire to link to the global
economy was much more far-sighted than
the autarky that crippled the Soviets over
their entire existence.
• As early as 1980, China renewed its
membership with the IMF and the World
Bank.
China and the WTO
• After more than a decade attempting to
gain admission to the WTO, China
officially joined on December 11, 2001
• China became the 143rd member.
The WTO
The WTO was created in 1995 from
the former GATT, General Agreement
on Tariffs and Trade.
Main purposes:
• Develop rules of trade with minimal
negative side effects
The WTO
Main purposes:
• Serve as an international forum for
further trade negotiations
• Handle trade disputes among
nations
Membership Benefits to
China’s Economy
• China obtains stable access to foreign
markets
• Foreign investors will continue to be
active in China
Benefits to
China’s Economy
Long-Term benefits
• Reward efficient firms which
become competitive
• Weed out weak firms, using their
resources more effectively
elsewhere
“Let China sleep, for when it wakes,
it will shake the world.”
-Napoleon