The Political Economy of China s Systemic Transformation
Victoria Mantzopoulos Probabilities and Statistics (with Xioahui Zhong) (2010) Fundamentals in Statistics, 2nd edition (2008) Fundamentals in Statistics (2002) Statistics for Comparative Politics and Economics (1996) Statistics for the Social Sciences, Prentice Hall (1995) Raphael Shen China s Economic Reform: an Experiment in Pragmatic Socialism (2000) The Restructuring of Romania s Economy: A Paradigm of Flexibility and Adaptability (1997) Ukraine s Economic Reform: Obstacles, Errors, Lessons (1995) Restructuring the Baltic Economies: Disengaging 50 Years of Integration with the U.S.S.R. (1994) Economic Reform in Poland and Czechoslovakia: Lessons in Systemic Transformation (1993) The Polish Economy: Legacies from the Past Prospects for The Future (1992)
The Political Economy of China s Systemic Transformation 1979 to the Present VICTORIA MANTZOPOULOS AND RAPHAEL SHEN
THE POLITICAL ECONOMY OF CHINA S SYSTEMIC TRANSFORMATION Copyright Victoria Mantzopoulos and Raphael Shen, 2011. All rights reserved. First published in 2011 by PALGRAVE MACMILLAN in the United States a division of St. Martin s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-28757-4 ISBN 978-0-230-11934-5 (ebook) DOI 10.1057/9780230119345 Library of Congress Cataloging-in-Publication Data Mantzopoulos, Victoria L., 1958 The political economy of China s systemic transformation : 1979 to the present / Victoria Mantzopoulos, Raphael Shen. p. cm. 1. China Economic policy 1976 2000. 2. China Economic policy 2000 3. China Economic conditions 1976 2000. 4. China Economic conditions 2000 5. Investments, Foreign China. I. Shen, Raphael. II. Title. HC427.92.M3575 2011 330.951 dc22 2010049103 A catalogue record of the book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: June 2011 10 9 8 7 6 5 4 3 2 1
Contents List of Illustrations Preface Acknowledgments vii ix xi 1 Legacies from Mao 1 2 The Political Economy of Reform after Mao 19 3 Reform Approach and Framework 35 4 Foreign Investment 55 5 Foreign Trade Reform 81 6 A Comparative Performance Study 111 7 Successes 141 8 Anomalies and Challenges 163 9 Concluding Observations 189 Notes 205 Bibliography 225 Index 235
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Illustrations Tables 4.1 Foreign Capital Inflow, 1979 2008 68 5.1 China s Foreign Trade, 1978 2008 98 5.2 Major Trading Partners 2005 2008 103 6.1 Correlation Matrix for Selected Variables by Country 127 7.1 Select Macro Indicators, 1979 2008 144 7.2 Select Macro Data for China, Poland, Romania and Ukraine, 1980 2008 157 Figures 6.1 GDP for China, Poland, Romania, and Ukraine 128 6.2 Foreign Direct Investment, Net Inflow 129 6.3 China s Foreign Reserve 130 6.4 Path Analysis Predicting GDP 136
Preface Sweeping systemic and structural changes have occurred in both former and contemporary communist regimes in recent decades. The respective reform approaches have varied from the Big Bang to gradualism strategies. Outcomes have also fluctuated from the impressive to the not nearly so. While economies in Eastern Europe were still in the tight embrace of the command system in the late 1970s, China began experimenting with elements of the market system. There was no prior experience to rely on. There was no historical lesson to learn from. China was indeed the pioneer. Experiences from the tumultuous decades under Mao Zedong induced the post-mao era Chinese leaders to insist on stability, whatever the cost. Introducing elements of the market into a fundamentally socialist system had to be orderly, deliberate, and experimental in nature. Only when successes consequent upon experimental reform measures were unmistakable was the scope, pace, and depth of reform policies permitted to advance. The motto for reform was enlivening within, opening up without. The sleeping giant of an economy frozen by an inflexible Command system was too cumbersome to awaken. That was particularly true for China s inefficient and wasteful industrial sector. A more active catalyst for change needed to come from without. It was upon opening up without that entrepreneurial spirit in nonfarm sectors began stirring. The cherished motto of politics in command was and has been operative throughout the past six decades. As reform began three decades ago, it was still political decisions that defined and promoted reform measures in economic spheres. Parameters of reform policies were clearly delineated and enforced. Foreseen or not, China s current successes may to a large measure be attributable to its successes in the external sector. More specifically, it has been the phenomenal growth in the export sector over the past three decades that has been the most instrumental in propelling China onto the world stage as an awakened economic giant. Successes in the export sector have in turn been highly dependent on China s successful foreign investment
x Preface policies. It was social calm and political stability enforced by the regime that assured prospective foreign investors that their ventures in China would be securely protected. The primary proposition of this study is that tight political controls, especially during early phases of systemic transformation, could be instrumental in securing stable and sustained economic growth. This manuscript first presents some background information on China s political and economic conditions prior to as well as during the early years of reform. Parameters for and successes in foreign investment and foreign trade were then introduced and briefly analyzed in chapters 4 and 5, respectively. Chapter 6 serves as the test tube for the thesis of this manuscript. That is, tight political controls during early phases of systemic transformation could be a significant factor in securing developmental successes. Quantitative performances of four transitional economies China, Poland, Ukraine, and Romania were subjected to statistical tests and analyses. To a large measure, results from analyses of macro data from the four economies seem to suggest that there are merits to the proposition of this study. Thereafter, successes, anomalies, and challenges were presented in chapters 7 and 8, respectively. Chapter 9 concludes this study. In the chapter, some of the prerequisites that are fundamental to success are outlined and briefly exemplified with historical instances. The topic of objective value is then raised, with the question as to the future direction of China s reform policies being raised and intimated.
Acknowledgments We are deeply indebted to Marrina Wenzhe Zhang, our graduate research assistant, for her intellectual acumen, her work ethic, and her professional competence. Her indefatigable readiness and willingness to be of assistance has been a dream come true. We are also deeply indebted to Samantha Kas-Petrus for her diligent work over the last several years and her meticulous eye for detail. We are also grateful for the contribution of Charles Palermo for his contributions to the project. Finally, we wish to sincerely thank our friends and family who supported us with great patience as we completed our work. Thank you.