WEEK 1 - Lecture Introduction Overview of Chinese Economy Since the founding of China in 1949, it has undergone an unusual and tumultuous process (Revolution Socialism Maoist radicalism Gradualist economic reform and rapid economic growth) Objective of the transition process - a moderately prosperous society with a market based economy - now mostly realised institutions reshaped, economic/political ideologies changed, material basis of economy rebuilt Past 36 years China has evolved from one of the world s most isolated socialist states to a powerhouse of global economy Relatively little large-scale conflict and relatively lower social costs that other transitional economies The Dual Transitions Twin challenges of underdevelopment and transition were interwoven at all stages of transition process Challenges of transition from a socialist command economy to a market economy many have been overcome, market is now the predominant economic institution Challenges of development rebuild the material basis of economy, poverty, invest in human skills and physical infrastructure, protect underprivileged and vulnerable sections of the population Convergence institutions and challenges increasingly resemble those in other developing countries China s Growth Performance 800000 700000 689052.1 GDP (100 million yuan) 600000 500000 400000 300000 200000 100000 3678.7 0 1 of 60
16 14 GDP growth rate, China GDP growth rate, World 12 10 8 6 4 2 0-2 -4 China s Growth Performance China s dramatic growth is the result of a unique historical confluence of three factors: structural, transitional and traditional Structural Transitional Traditional - Physical capital - Labor - Human capital - Successful transition to a market-based economy - Revival of traditional economic relationships - Long history of state operation, rich institutions, trust and familiarity with commercial procedures - Re-emergence of traditional commercial ties with Chinese in Hong Kong, Taiwan Becoming a normal country - After years of reform, the Chinese economy has become much closer to normal patterns GDP per capita (US$8865.999 in 2016 = typical middleincome country), industry development, energy consumption, urbanisation rate, life expectancy - Features of Chinese economy rapid and unusually persistent economic growth, high investment rates, high contribution of manufacturing to GDP and to growth, dramatic increase in participation in world economy - Still unique and difficult to understand due to its size, diversity, rapid growth, complex legacy of the past - As China develops, its contributions to world welfare will increase scientific and medical discoveries, new products, revitalised cultural contribution (i.e. high speed train, e-commerce, mobile payment) 2 of 60
Geographical Setting - Western half (dry and mountainous) 6% of pop - Eastern half 94% of pop - North, northeast and lower yangtze macroregions make up bulk of Chinese economy 46% of pop, 55% of GDP Regional Differentiation - Since 1978 economic growth has been more robust in the coastal provinces than in inland - However idea of a coast-inland gap by itself is too simple to capture complexities of China s economic geography (The rise of coastal regions is due to the fundamental shift from China s traditional inward orientation to its new globalised and outward looking economy) - Greatest developmental challenges are in areas along the Aihui-Tengchong line poverty, environmental degradation, social programs Traditional Chinese Economy, 1127-1911 - Chinese traditional society was overwhelmingly rural 90% pop living in countryside - High-productivity traditional agriculture crop yields per unit of land were high, massive application of human labor to small plots of land, growing pop was supported yet incomes and consumption standards remained low - Dense population and highly developed systems of water transport supported a highly commercialised pre-modern economy - Sophisticated institutions widespread use of money, large formal organisations, advanced commercial procedures - Competitive markets coal/iron/textiles/tea, land/labor - Small scale, bottom-heavy economy agriculture based on individual, nonagricultural production was also small-scale and done by rural households - Around 960-1300, China s GDP per capita was similar to Euro levels largest economy in the world - Crisis of traditional economy by 1800s, China s economy had stagnated - Sophisticated traditional agriculture allowed the growth of a huge population, but that population was highly vulnerable to any breakdown in the system high-level equilibrium trap - Failed response to the West and Japan prolonged period of foreign enrichment and national humiliation, GDP: 32% of world GDP in 1820, 9% by 2013 pop dropped from 1/3 to 1/4 of total world pop The Beginnings of Industrialisation, 1912-1937 - After collapse of the Qing dynasty and the 1911 Revolution, China entered a new phase modern industrial development began, modern transportation and communication links opened up new possibilities for other sectors 3 of 60
- Industry from a tiny base, modern factory production grew at 8-9% annually between 1912-1936 treaty port industrialisation and manchurian industrialisation - Development small but significant modern sector grew, however, it didn t fundamentally change the overall structure of the Chinese economy Legacies of the Pre-1949 Economy - Legacy for the Socialist Era (1949-1978) extreme disruption to economic infrastructure, financial chaos, poor, experience with foreign aggression led to support for close-door socialist development strategies Legacy for the post-1978 market economy - As China began to open up, familiarity with the traditional household-based economic system provided a robust potential to adapt to new economic opportunities - Small-scale household businesses sprang up throughout China to meet the market needs that had been neglected under socialism - Traditional economic centres revived - Revival of traditional market-based organisational forms 4 of 60
WEEK 2 - Lecture The Socialist Era, 1949-1978 After 1949, the Chinese economy was wrenched out of its traditional framework and completely re-orientated - Developed a massive socialist industrial complex through direct government control - Neglected labor-intensive sectors, and poured resources into capital-intensive factories - A new inward-directed strategy - The USSR as primary model, chief trading partner and source of technology Big Push Development Strategy - Socialist heavy-industry-priority development strategy - Gov direct control of bulk of economy - Rapid industrialisation was given highest priority - Resources pumped into construction of new factories - Consumption was squeezes - Investment increased rapidly to over 20% of national income Investment as a share of GDP, 1952-2015 60% 50% Percent of GDP 40% 30% 20% 10% 0% 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 5 of 60
Two Contrasting Industrialisation Strategies in the 1950 s Basic strategy Heavy-industry-priority, PRC Strategic industries with most upstream and downstream linkages Light-industry-priority, Taiwan, HK Begin with good downstream consumer goods industries; gradually work upstream Saving done by Government, SOE households, private businesses, gov Investment decisions Government Private business, government, infrastructure Source of demand growth domestic industries, gov investment, projects foreign and domestic consumer-goods markets Household income slow growing moderate to fast growing Coordination by Plan Market with some government steerage Openness to world Low High Characteristics of the Command Economic system in China in the 1950 s Public Ownership Planned production targets & resource allocation Controlled price system The nomenklatura system - Gov owned all large factories, transportation and communication enterprises - In countryside, agricultural collectives took ownerships of the land and management of farm economy - Production targets assigned to firms and resources and goods directly allocated among different producers - Finances were used to audit and monitor performance, not to drive investment - Government controlled the price system and set relative prices to channel resources into government hands and into Big Push industrialisation - A hierarchical personnel system in the public sector - The communist party controlled managerial career paths China compared to the Soviet Union - There was less decision making authority at the top (central gov) and bottom (enterprise) of the Chinese Industrial economy - Core planning system in China was must less centralised and much less tightly controlled than it was in the Soviet Union small firms were more important in China s industrial structure, transportation/communication were less developed - Typical SOE s had little authority could not adjust its labor force, did not retain profit - More authority, however, could be exercised by those in the middle, typical local gov officials especially in the 70 s, financial decentralisation provided local governments with substantial leeway in making economic development decisions - Ideological and social control was tight politics was in command, strict controls over labor (including renumeration) 6 of 60